SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                              ---------------------


                                   FORM 10-K/A
                                 Amendment No. 1


(Mark one)

      X       Annual report pursuant to Section 13 or 15(d) of the Securities
              Exchange Act of 1934 for the fiscal year ended July 31, 2001

                                       OR

              Transition   report  pursuant  to  Section  13  or  15(d)  of  the
              Securities Exchange Act of 1934 for the transition period from to

                           Commission File No. 1-13851
                                ----------------

                                   SONUS CORP.
             (Exact name of registrant as specified in its charter)

           Yukon Territory, Canada                  Not Applicable
    (State or other jurisdiction of      (I.R.S. employer identification no.)
     incorporation or organization)

      111 S.W. Fifth Avenue, Suite 1620                 97204
            Portland, Oregon                          (Zip code)
(Address of principal executive offices)

       Registrant's telephone number, including area code (503) 225-9152

      Securities registered pursuant to Section 12(b) of the Exchange Act:

  Title of Each Class               Name of Each Exchange on Which Registered
  -------------------               -----------------------------------------
Common Shares, without nominal or par value            American Stock Exchange

    Securities registered pursuant to Section 12(g) of the Exchange Act: None
                        --------------------------------

     Indicate by check mark  whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value is computed
by  reference to the price at which the common  equity was sold,  or the average
bid and asked prices of such common equity, as of November 30, 2001: $3,334,366.

      Indicate the number of shares outstanding of each of the registrant's
classes of common stock: Common Shares, without nominal or par value, 6,150,164
shares as of November 30, 2001.


                      Documents Incorporated by Reference:

     Portions of the registrant's definitive Management Information Circular and
Proxy Statement dated November 30, 2001, are incorporated by reference into Part
III of this Form 10-K.

<PAGE>
                                EXPLANATORY NOTE

     Sonus Corp.  (the  "Company") is filing this Amendment No. 1 on Form 10-K/A
as an amendment to its Annual Report on Form 10-K for the fiscal year ended July
31, 2001 (the "Form  10-K").  The  purposes of this  Amendment  are to amend and
restate  in  their   entirety  Items  7,  7A,  8,  and  14  of  the  Form  10-K.

                           FORWARD-LOOKING STATEMENTS

     Statements  in this report,  to the extent they are not based on historical
events,  constitute  forward-looking   statements.   Forward-looking  statements
include,  without  limitation,   statements  containing  the  words  "believes,"
"anticipates,"  "intends," "expects," and words of similar import. Investors are
cautioned  that  forward-looking  statements  involve  known and unknown  risks,
uncertainties and other factors that may cause the actual results,  performance,
or achievements  of Sonus Corp. (the "Company") to be materially  different from
those described herein. Factors that may result in such variance, in addition to
those accompanying the  forward-looking  statements,  include economic trends in
the Company's  market areas, the ability of the Company to manage its growth and
integrate new acquisitions into its network of hearing care centers, development
of new or  improved  medical  or  surgical  treatments  for  hearing  loss or of
technological  advances in hearing  instruments,  changes in the  application or
interpretation of applicable government laws and regulations, the ability of the
Company to complete  additional  acquisitions  of hearing  care centers on terms
favorable  to the  Company,  the degree of  consolidation  in the  hearing  care
industry,   the  Company's   success  in  attracting  and  retaining   qualified
audiologists  and staff to operate its hearing care centers,  the ability of the
Company to attract  audiology  centers as members of The Sonus Network,  product
and  professional  liability  claims brought against the Company that exceed its
insurance coverage,  the Company's ability to collect its accounts receivable in
a timely manner,  and the  availability  of and costs  associated with potential
sources of working capital.  The Company  disclaims any obligation to update any
such factors or to publicly  announce the result of any  revisions to any of the
forward-looking   statements  contained  herein  to  reflect  future  events  or
developments.
                                      -2-
<PAGE>

ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Recent Developments

     During  the 2001  fiscal  year,  the  Board  of  Directors  of the  Company
recognized  there were  significant  problems  managing  the rapid growth of the
business and that the financial condition of the Company had not improved during
fiscal 2001 as evidenced by increases in accounts receivable,  other receivables
and  accounts  payable.  As a result,  the  Company  implemented  the  following
business initiatives beginning in the fourth quarter of fiscal 2001:

o    A new Chief Executive Officer and Chief Financial Officer were hired. A new
     Chief Information  Officer and Vice  President-Marketing  were added in the
     first quarter of fiscal 2002.

o    The  Company  increased  the  number  of  employees  in  its  Reimbursement
     Department from 10 to19.


o    A  $20,000,000  line of credit with GN Great Nordic A/S, an affiliate of GN
     ReSound North America Corporation, a major hearing instrument manufacturer,
     was executed.  A related  seven-year  product supply agreement was executed
     with GN ReSound North America Corporation.  The line of credit provides the
     Company with capital to pursue acquisition of independent  hearing clinics,
     while the  product  supply  agreement  provides  for  improved  pricing and
     commissions to the Company on hearing instruments.


o    Negotiations  were  initiated  with  two  other  major  hearing  instrument
     manufacturers for the purpose of securing long-term supply relationships.


o    An independent  information  technology firm,  Emerald Delaware,  Inc. (dba
     Emerald Solutions,  Inc.), was engaged to assess the Company's  information
     systems and make  recommendations  for  improving  the current  information
     systems environment.


o    Acquisitions  of hearing care practices  were curtailed  until such time as
     new  management is satisfied  that the Company's  acquisition  criteria and
     infrastructure are both appropriate and adequate.

As a result of the ongoing implementation of these initiatives,  the Company has
positioned  itself for  improved  financial  results.  However,  there can be no
assurance  that the  Company  will be  successful  in  improving  its  financial
performance.

Overview of Fiscal 2001

     For the fiscal  year ended  July 31,  2001,  the  Company  generated  total
revenues of $48.9  million,  an increase of 11% over fiscal 2000. For the fiscal
year ended July 31,  2001,  the Company  incurred a loss  before the  cumulative
effect of a change in  accounting  principle  of $5.2  million,  compared to the
fiscal 2000 loss of $3.1 million. As of July 31, 2001, the Company's accumulated
deficit was $22.1 million and its total shareholders' equity was $18.0 million.

Acquisitions

     During the fiscal  year ended July 31,  2001,  the Company  acquired  eight
hearing care centers in eight  transactions.  The Company also  consolidated  10
centers  into  existing  centers  during  the  fiscal  year  in  order  to  more
efficiently  allocate  its  resources.  The  aggregate  purchase  price  for the
acquisitions consisted of cash payments of $177,000,  promissory notes issued by
the Company of $393,000  generally  payable over three years,  $16,000 of common
stock, and $12,000 in assumed liabilities. As a result of the acquisitions,  the
Company recorded  approximately  $141,000 in property and equipment,  $15,000 in
other assets, $402,000 in goodwill, and $40,000 for covenants not to compete.

     The eight hearing care businesses acquired by the Company during the fiscal
year  ended  July  31,  2001,  have  combined   historical  revenues  for  their
immediately  preceding fiscal years of approximately  $2.1 million.  The

                                      -3-
<PAGE>

Company  expects these centers to  contribute to the Company's  future  revenues
consistent with their historical revenues,  as well as to have a positive effect
on cash flows and liquidity.

     As of July 31, 2001,  the Company had recorded  $21,336,000 in goodwill and
$2,274,000  in  covenants  not  to  compete.  The  unamortized  balance  totaled
$18,561,000  at  July  31,  2001,  which  represented  approximately  46% of the
Company's total assets and 103% of the Company's shareholders' equity.

Intangible Assets

     The  Company's  intangible  assets  have arisen due to the  acquisition  of
hearing centers.  Management reviews  intangible assets for impairment  whenever
events or changes in circumstances  indicate that the carrying amount may not be
recoverable. Such events could include, but are not limited to, the inability of
hearing centers to achieve planned growth rates and  profitability,  or the loss
of a key supplier or vendor.  Impairment  is measured by comparing  the carrying
value of the intangible assets to the estimated  undiscounted  future cash flows
expected to result  from use of the assets and their  ultimate  disposition.  In
circumstances  where  impairment is determined to exist,  the Company will write
down the  asset to its  fair  value  based  on the  present  value of  estimated
expected future cash flows. Because management's impairment analysis is based on
estimates of future cash flows,  there is a reasonable  possibility  that future
analyses may indicate  that the  Company's  intangible  assets are impaired to a
greater  degree if  actual  cash  flow  results  materially  differ  from  these
estimates.

     As indicated under "Accounting  Pronouncements"  below, the Company will be
required to adopt the provisions of two new accounting  pronouncements that will
directly  affect  intangibles  and  other  long-lived  assets  and  management's
requirements  to assess  the  impairment  of these  assets.  Management  has not
completed its assessment of the impact of these  pronouncements  on the Company,
but expects that the Company will no longer amortize its goodwill.  Amortization
totaled $1,100,000 for the year ended July 31, 2001.

Income Taxes

     There was no  provision  for income tax  expense or benefit  for any period
since inception due to the Company's  operating losses. As of July 31, 2001, the
Company had  approximately  $19,100,000 of net operating loss  carryforwards for
federal  income tax purposes,  which expire from 2011 to 2021.  The Company also
had  approximately  $3,000,000 of net operating loss  carryforwards for Canadian
income tax purposes,  which expire from 2002 to 2008.  The Company would need to
generate a minimum of  $22,100,000 of future taxable income to fully realize the
deferred tax assets. Due to the issuance and sale of Series A preferred stock in
1997, the Company incurred ownership changes pursuant to applicable  regulations
in effect under the Internal  Revenue Code of 1986, as amended.  Therefore,  the
use of losses incurred  through the date of the ownership change will be limited
during the carryforward  period.  To the extent that any single-year loss is not
utilized to the full amount of the limitation,  such unused loss is carried over
to subsequent  years until the earlier of its  utilization  or the expiration of
the relevant carryforward period.

     Deferred tax assets consist  primarily of net operating loss  carryforwards
and the allowance  for doubtful  accounts.  Because of the Company's  history of
operating  losses,  management does not have a sufficient  basis to project that
future  income will be  sufficient to realize the deferred tax assets during the
carryforward  period.  As a result,  the Company has  provided a full  valuation
allowance  on the net  deferred  tax  assets  for  all  periods  presented.  The
valuation  allowance has increased each fiscal year primarily due to that fiscal
year's net  operating  loss  carryforward  and the increase in the allowance for
doubtful accounts.

Results of Operations

Year Ended July 31, 2001, Compared to Year Ended July 31, 2000

     Revenues.  Net  revenues  for the fiscal  year ended  July 31,  2001,  were
$48,934,000,  representing  an 11% increase over net revenues of $43,959,000 for
the prior fiscal year. The increase was due to increased revenues from The Sonus
Network and Hear PO Corp. of $9,389,000, which were offset by a decrease in same
store revenue for

                                      -4-
<PAGE>

Company-owned  hearing  centers of 15% for the fiscal  year ended July 31,  2001
compared  to the fiscal  year ended July 31,  2000.  The  decrease in same store
revenue reflected a slowing economy and decreased sales in the hearing industry.
Product sales revenues were  $34,997,000  for the 2001 fiscal year, down 6% from
$37,252,000 for fiscal 2000.  Audiological  service revenues  increased 26% from
$3,589,000 in fiscal 2000 to $4,539,000  for the 2001 fiscal year.  The increase
in service  revenue  resulted  primarily  from the  adoption of  Securities  and
Exchange  Commission Staff Accounting  Bulletin No. 101,  discussed below. Other
revenues  increased 201% to $9,398,000 in fiscal 2001 from  $3,118,000 in fiscal
2000 due to the rapid growth of The Sonus Network.

     As further described below under "Cumulative Effect of Change in Accounting
Principle,"  the  Company  adopted  Securities  and  Exchange  Commission  Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial  Statements" ("SAB
101") effective  retroactive to August 1, 2000. The adoption of SAB 101 resulted
in a reduction of 2001 revenues in the amount of $6,000 (comprised of revenue in
the  amount  of  $1,313,000  that had been  recognized  in prior  years  but was
deferred  under  the new  rules  and  recognized  in  2001,  offset  by  revenue
originating in 2001 in the amount of $1,319,000 deferred to future years).

     Gross  Profit on Product  Sales.  Product  gross profit for the fiscal year
ended July 31,  2001,  was  $18,606,000  compared to  $24,365,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  decreased to 53% for
fiscal  2001 from 65% for fiscal  2000.  The  decrease in product  gross  profit
percentage was due to the  reclassification  of revenue from product  revenue to
service  revenue in  connection  with the  adoption  by the  Company of SAB 101,
increased  sales of lower margin  hearing  aids, a higher  proportion of revenue
from Hear PO Corp.,  which has lower gross  profit  margins  than the  Company's
hearing  care  centers,  and  an  increase  in  the  provision  for  contractual
allowances related to insurance reimbursement.

     Clinical  Expenses.  As  a  percentage  of  combined  product  and  service
revenues,  clinical expenses increased to 50% for the fiscal year ended July 31,
2001, compared to 48% for the fiscal year ended July 31, 2000. Clinical expenses
for the fiscal  year ended July 31,  2001,  were  $19,904,000,  representing  an
increase of 2% over clinical  expenses of $19,494,000 for the prior fiscal year.
Approximately  78% of this  increase  was due to increased  personnel  expenses.
Clinical  expenses  include  all  personnel,   marketing,  occupancy  and  other
operating expenses at the center level.

     Provision  for Doubtful  Accounts.  The  Company's  provision  for doubtful
accounts  decreased from  $2,691,000 for the fiscal year ended July 31, 2000, to
$851,000  for the fiscal year ended July 31,  2001.  The  decrease  was due to a
$2,300,000  charge that was  incurred  by the  Company in the fourth  quarter of
fiscal  2000 to reflect  the  deterioration  of  accounts  receivable  caused by
certain  events that took place  during  that  quarter.  Without the  $2,300,000
charge taken in fiscal 2000, the provision for doubtful accounts for fiscal 2001
increased $460,000,  or 118%, compared to fiscal 2000,  reflecting  management's
determination  that  additional  reserves for doubtful  accounts were  necessary
based on a review of historical collections and outstanding receivables.

     General and  Administrative  Expenses.  As a  percentage  of net  revenues,
general and  administrative  expenses increased to 27% for the fiscal year ended
July 31, 2001, versus 20% for the same period in the prior fiscal year.  General
and  administrative  expenses  increased 51% from $8,778,000 for the fiscal year
ended July 31, 2000, to $13,248,000 for the fiscal year ended July 31, 2001. The
increase was due to an increase of  $1,538,000  in personnel  costs  relating to
building the Company's  infrastructure,  $1,705,000 in advertising costs for The
Sonus Network,  $1,152,000 for professional  consulting and accounting fees, and
$260,000 for electronic  connectivity between the Company's hearing care centers
and the corporate headquarters.

     Depreciation  and  Amortization  Expense.   Depreciation  and  amortization
expense for the fiscal year ended July 31, 2001, was $3,921,000,  an increase of
26% over the depreciation  and amortization  expense of $3,109,000 for the prior
fiscal  year.  The  increase  resulted  from the  recognition  of a full year of
depreciation and amortization  expenses related to fixed assets and hearing care
clinics, respectively, purchased during fiscal 2000 and, to a lesser extent, the
depreciation  of  property  and  equipment  and  amortization  of  goodwill  and
covenants not to compete  associated with the eight additional  centers acquired
by the Company during the fiscal year ended July 31, 2001.

     Other  Income and Expense.  Interest  income for the fiscal year ended July
31,  2001,  was  $105,000  compared  to

                                      -5-
<PAGE>

$260,000 for the prior  fiscal year,  reflecting  lower  balances of  short-term
investments.  Interest  expense  for the fiscal  year ended July 31,  2001,  was
$357,000  compared  to  $342,000  for the fiscal  year ended July 31,  2000,  an
increase of 4%, due to the use of the  Company's  bank line of credit and higher
balances of long-term debt incurred in connection with  acquisitions and capital
expenditures. The Company also recognized other income, net of other expense, of
$388,000 for the year ended July 31, 2001, primarily as the result of settling a
lawsuit  brought by the Company  against  Starkey  Laboratories,  Inc. and other
defendants for misappropriation of a customer list owned by the Company.

     Cumulative  Effect of Change in  Accounting  Principle.  During  the fourth
quarter of the year ended  July 31,  2001,  the  Company  changed  its method of
accounting  retroactively to August 1, 2000.  Based on guidance  provided in SAB
101 the Company  concluded  that when a sale of a hearing  instrument is coupled
with the  performance  of future  services or  obligations  for free  batteries,
revenue  related to the fair value of the  obligations  should be  deferred  and
recognized as revenue as the obligations are discharged.  The Company's previous
revenue  recognition  policy was to recognize all revenue on the sale of hearing
instruments,  including post-sales services,  at the time the hearing instrument
was  delivered  and to accrue  the cost of  estimated  battery  replacement.  In
accordance  with SAB 101, the Company  recorded a non-cash  charge of $2,114,000
(or $0.35 per share,  basic and diluted) to reflect the cumulative effect of the
change as of August 1, 2000.  Revenue of $1,313,000  included in the  cumulative
effect was  recognized as revenue in the year ended July 31, 2001.  For the year
ended July 31, 2001,  the increase to net loss before the  cumulative  effect of
the change in  accounting  principle  as a result of the adoption of SAB 101 was
$6,000.  For the fiscal year ended July 31, 2001,  the Company's net loss before
the  cumulative  effect of the change in  accounting  principle  was  $5,245,000
compared to a net loss of $3,101,000 for the fiscal year ended July 31, 2000. If
the Company had implemented these revenue recognition practices beginning August
1, 1998,  net loss for the years  ended  July 31,  2000 and 1999 would have been
increased by $851,000 and $1,263,000, respectively.

     Deemed  Dividend  to  Preferred  Shareholder.  On  issuance,  shares of the
Company's  2,500,000  outstanding  Series B  Convertible  Preferred  Shares (the
"Series B Shares") were  convertible  into common shares on a one for one basis.
However,  the terms of the of the Series B Shares provide that after October 31,
2000, the conversion  rate is subject to upward  adjustment  each fiscal quarter
until the Company attains specified  quarterly  earnings targets.  The amount of
such  quarterly  adjustment is based on a factor of 2% of the original  purchase
price plus the sum of all prior adjustments  until November 1, 2004,  increasing
in steps thereafter to 4.5% beginning November 1, 2006. Once the Company has met
the  specified  earnings  targets  for four  consecutive  quarters,  no  further
adjustment to the conversion  price will be made.  Additionally,  the conversion
price was subject to further adjustment if the Company failed to collect certain
receivables  prior to July 31,  2000.  Because  the  Company  failed to  collect
certain of these  receivables  and did not meet the quarterly  earnings  targets
during  fiscal 2001,  the  conversion  rate was adjusted  such that the Series B
shares are  convertible  into  3,950,214  common  shares at July 31,  2001.  The
Emerging Issues Task Force consensus 98-5 "Accounting for Convertible Securities
with  Beneficial  Conversion  Features  or  Contingently  Adjustable  Conversion
Ratios"  provides  that  contingent  beneficial  conversion  features  are to be
recognized  when  the  contingencies  are  resolved.  Accordingly,  the  Company
recorded  a deemed  dividend  to the  holder of Series B Shares in the amount of
$5,801,000 during the year ended July 31, 2001.

     Also in fiscal 2001,  the Company  adopted the  Emerging  Issues Task Force
consensus  00-27   "Application  of  Issue  No.  98-5  to  Certain   Convertible
Instruments" (EITF 00-27). Upon the adoption of EITF 00-27, management concluded
that the Series B Shares contained an additional  beneficial  conversion feature
requiring the allocation of the proceeds from the sale of the Series B Shares in
October  1999  between  the  relative  fair  value of the  Series B Shares and a
related modification of warrants to purchase Common Shares held by the holder of
the Series B Shares.  Accordingly,  commensurate with the adoption of EITF 00-27
during the year ended July 31, 2001, the Company  recorded an additional  deemed
dividend to the holder of the Series B Shares in the amount of $1,554,000.

Year Ended July 31, 2000, Compared to Year Ended July 31, 1999

     Revenues.  Net  revenues  for the fiscal  year ended  July 31,  2000,  were
$43,959,000,  representing a 30% increase over net revenues of  $33,759,000  for
the prior fiscal year.  The increase was due to the 16 centers  acquired  during
fiscal  2000,  as well as an increase of 5% in  same-store  revenue  compared to
1999.  Product sales revenues were  $37,252,000 for the 2000 fiscal year, up 28%
from the $29,044,000 for fiscal 1999. Audiological service revenues

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increased 6% from  $3,392,000 in fiscal 1999 to  $3,589,000  for the 2000 fiscal
year. Other revenues increased 136% to $3,118,000 in fiscal 2000 from $1,323,000
in fiscal 1999 due to the rapid growth of The Sonus Network.

     Gross  Profit on Product  Sales.  Product  gross profit for the fiscal year
ended July 31,  2000,  was  $24,365,000  compared to  $18,278,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  increased to 65% for
fiscal  2000 from 63% for fiscal  1999.  The  increase in product  gross  profit
percentage  was  due to  more  favorable  contracts  with  suppliers,  increased
utilization of the Company's private-label hearing instruments, and better price
management.

     Clinical  Expenses.  As a percentage  of net  combined  product and service
revenues,  clinical expenses decreased to 48% for the fiscal year ended July 31,
2000,  compared to 54% for the fiscal year ended July 31, 1999.  The  percentage
decrease  was  due  to  the  Company's  ability  to cut  costs,  streamline  its
operations,  and  eliminate  inefficient  and  duplicative  processes.  Clinical
expenses for the fiscal year ended July 31, 2000, were $19,494,000, representing
an increase of 12% over clinical  expenses of  $17,406,000  for the prior fiscal
year. This increase was primarily due to clinical  expenses  associated with the
16 additional  centers that were acquired by the Company  during the fiscal year
ended  July 31,  2000.  Clinical  expenses  include  all  personnel,  marketing,
occupancy and other operating expenses at the center level.

     Provision for Doubtful Accounts.  During the fourth quarter of fiscal 2000,
the  Company  incurred a charge of  $2,300,000  to  increase  its  reserves  for
accounts  receivable.  The Company  determined  that an increase in reserves was
necessary  because of a deterioration of accounts  receivable  caused by certain
events that took place in the fourth  quarter of fiscal 2000.  During the fourth
quarter of fiscal 2000, the Company received  correspondence  from a significant
third-party customer stating that a majority of a sample of the Company's claims
examined by the customer were ones for which the original  claim  submission was
not received or the claims were denied and no evidence of timely  follow-up  was
demonstrated. Although the Company believed that the customer's conclusions were
incorrect  regarding many of these claims, it concluded that certain receivables
aggregating  approximately  $544,000  were  at  substantially  greater  risk  of
non-payment and that the prudent course of action was to establish a reserve for
these receivables.  In addition, the Company discontinued its normal billing and
collections  cycle  related to new  business  in the fourth  quarter in order to
attempt to meet an obligation under a financing  agreement to collect a specific
portion of its aged  receivables  by July 31, 2000. The entire billing staff was
dedicated exclusively to this project during May 2000 (and a substantial portion
of the staff was dedicated to this project in June and July 2000).

As a result,  net accounts  receivable  (before the $2,300,000 charge) increased
$2,400,000  during the fourth quarter compared to $2,700,000 for the prior three
quarters  combined.  The Company's  diminished  focus on current business in the
fourth quarter caused substantial deterioration in its accounts receivable aging
and reduced the  collectibility  of the fourth quarter  business.  The financing
agreement  obligation ended on July 31, 2000, at which time the Company returned
to its normal billing cycle after determining that  concentrating its efforts on
collecting  receivables that were more current would yield greater benefits. The
Company  therefore  determined  that an addition  to the  reserve  for  doubtful
accounts as of July 31, 2000, was necessary  because it was likely that a higher
proportion of the receivables outstanding at that date would not be collected.

     General and  Administrative  Expenses.  As a  percentage  of net  revenues,
general and  administrative  expenses decreased to 20% for the fiscal year ended
July 31,  2000,  versus 22% for the same period in the prior  fiscal  year.  The
decrease in general and administrative  expenses as a percentage of revenues was
due to  growth  in the  Company's  revenue  base as a  result  of its  strategic
acquisition program and enhanced marketing efforts, as well as continued efforts
to decrease  administrative costs. General and administrative expenses in dollar
terms  increased 16% from $7,583,000 for the fiscal year ended July 31, 1999, to
$8,778,000  for the fiscal year ended July 31,  2000.  The  increase  was due to
increased  personnel costs and other corporate  expenses related to building the
appropriate infrastructure to support the growth of the Company.

     Depreciation  and  Amortization  Expense.   Depreciation  and  amortization
expense for the fiscal year ended July 31, 2000, was $3,109,000,  an increase of
27% over the $2,450,000 in depreciation and  amortization  expense for the prior
fiscal  year.  The  increase  resulted  from the  depreciation  of property  and
equipment and  amortization of goodwill and covenants not to compete  associated
with the 16 additional  centers  acquired by the Company  during

                                      -7-
<PAGE>

the fiscal year ended July 31, 2000.

     Other  Income and Expense.  Interest  income for the fiscal year ended July
31, 2000, was $260,000 compared to $261,000 for the prior fiscal year.  Interest
expense  for the fiscal  year ended July 31,  2000,  was  $342,000  compared  to
$300,000  for the fiscal year ended July 31,  1999,  an increase of 14%,  due to
higher balances of long-term debt incurred in connection with  acquisitions  and
capital expenditures.

Liquidity and Cash Reserves

     For the fiscal year ended July 31,  2001,  net cash  provided by  operating
activities was  $3,005,000  compared to a net use of $2,051,000 for fiscal 2000.
Net cash provided by operating  activities  for fiscal 2001  resulted  primarily
from increases in accounts payable, other accrued liabilities, deferred revenue,
and  accrued   payroll  of  $3,189,000,   $445,000,   $157,000,   and  $248,000,
respectively,  a decrease in accounts receivable of $722,000,  and the Company's
provision  for doubtful  accounts,  provision  for  slow-moving  inventory,  and
depreciation  and  amortization  expense of $851,000,  $78,000,  and $3,921,000,
respectively.  This was  offset  by the  Company's  net loss of  $7,359,000  and
increases in other  receivables,  inventory,  and prepaid  expenses of $894,000,
$202,000, and $267,000,  respectively.  For the fiscal year ended July 31, 2000,
net cash used in operating activities was $2,051,000. Net cash used in operating
activities  for fiscal 2000  resulted  primarily  from the Company's net loss of
$3,101,000  and  increases  in  accounts  receivable,   other  receivables,  and
inventory of  $4,971,000,  $1,141,000,  and  $447,000,  respectively,  offset by
increases in accounts  payable and accrued  payroll of $1,431,000  and $246,000,
respectively,  and the Company's  provision for doubtful  accounts of $2,691,000
and depreciation and amortization of $3,109,000.

     Net cash used in  investing  activities  was  $5,841,000  for fiscal  2001,
resulting  primarily from the investment of restricted  acquisition  funds,  the
purchase of property and equipment,  and net cash paid for business acquisitions
of  $4,885,000,  $568,000 and $177,000,  respectively.  In fiscal 2000 investing
activities used net cash of $3,706,000,  consisting primarily of the purchase of
property and equipment of $3,305,000 and net cash paid for business acquisitions
of $438,000.


     On May 31, 2001,  Sonus-USA entered into a seven-year credit agreement (the
"Credit   Agreement")  with  GN  Great  Nordic  A/S,  an  affiliate  of  one  of
theCompany's major hearing instrument  suppliers.  The Credit Agreement provides
for the  Company  to borrow  up to  $20,000,000  for the  purpose  of  acquiring
independent  hearing  clinics.  The Credit  Agreement also allows the Company to
borrow  up to  the  greater  of  $50,000  or 20% of  the  purchase  price  of an
acquisition for the purpose of paying fees,  costs,  and expenses related to the
acquisition.  Borrowings  may be made until May 31,  2006.  Interest  is payable
quarterly. No repayments of principal are required during the first two years of
the credit  agreement  ending May 31, 2003.  As of July 31, 2001 the Company had
$5,000,000  outstanding under the Credit  Agreement.  All loans bear interest at
6%.  Sonus-USA has pledged as security for borrowings under the Credit Agreement
all accounts,  inventory,  general intangibles,  chattel paper, and interests in
subsidiaries  formed to hold assets  acquired  with the  proceeds of  borrowings
("Acquisition  Subsidiaries").  In addition, such Acquisition  Subsidiaries have
pledged as security all inventory, general intangibles,  documents, instruments,
equipment,  investment  property,  collateral  accounts,  and books and  records
(including customer lists) acquired with the proceeds of borrowings. At July 31,
2001, the Company was in violation of leverage  ratio and fixed charge  coverage
ratio covenants under the Credit Agreement.  The Credit Agreement was amended on
November 19, 2001, to bring the Company into compliance with such covenants, but
there can be no assurance that the Company will meet the covenants of the Credit
Agreement in the future.  As a result,  the amount  outstanding under the Credit
Agreement is classified as short-term.


     Concurrent with the execution of the Credit Agreement,  the Company entered
into  a  seven-year  sales  agreement  with  the  hearing  instrument  supplier.
Beginning  with the period from October 1, 2001 to December  31,  2001,  and for
each  calendar  year  thereafter,  the Company is required to purchase a minimum
number  of  hearing  instruments  from the  supplier.  If the  minimum  purchase
requirement  is not met in any period,  the Company is required to refund to the
supplier  a  portion  of the  discounted  sales  price  of  hearing  instruments
purchased by the Company during such period.

                                      -8-
<PAGE>



     In  July  2000,  the  Company,   through  its  subsidiaries  Sonus-USA  and
Sonus-Texas, entered into a revolving line of credit agreement with a commercial
bank,  U.S. Bank National  Association.  The line of credit,  which is primarily
secured by accounts receivable,  matures on December 3, 2001, and bears interest
at the  bank's  prime rate plus  0.5%.  As of July 31,  2001,  the  Company  had
borrowed  $600,000  under the line of credit.  The Company was in  violation  of
certain  financial  covenants  under  the line of  credit  as of July 31,  2001,
relating to its net worth,  current ratio, and earnings before interest,  taxes,
depreciation,  and amortization. As a result, the unpaid balance of $600,000 was
immediately due and payable.  However,  the bank has waived compliance with such
covenants and has agreed to allow the Company to repay the  outstanding  balance
after maturity by making an initial payment of $150,000 on December 3, 2001, and
subsequent  monthly payments of $100,000 until the amount owing has been paid in
full.


     During fiscal year 2001,  the Company  received  advances of long-term debt
and capital lease  obligations  of $5,287,000,  which were  partially  offset by
repayments of  $2,372,000.  As a result of the foregoing,  financing  activities
provided net cash of $3,384,000 in fiscal 2001.

     Financing  activities  provided  net cash of  $6,038,000  in  fiscal  2000,
primarily as a result of the issuance of preferred stock in October 1999 for net
proceeds of $9,860,000, offset by repayments of long-term debt and capital lease
obligations  of $3,237,000  and  repayments of bank loans and  short-term  notes
payable of $500,000.

     The terms of certain of the Company's  acquisition  agreements  provide for
additional consideration to be paid if the acquired entity's revenues or results
of operations  exceed certain target levels.  Such additional  consideration  is
paid in cash and is  recorded  when earned as  additional  purchase  price.  The
maximum amount of contingent  consideration  that the Company may be required to
pay is $421,000 for the year ended July 31, 2002 and $246,000 thereafter.

     The  Company's  ability to generate  net cash from  operations  will depend
heavily on its  ability  to collect  existing  accounts  receivable  in a timely
manner.  Notwithstanding this, the Company believes that its cash and short-term
investments  and cash generated from  operations  will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures through July
31, 2002.  The Company also believes that it can reduce  expenditures  or obtain
support  from  its  major  shareholder  to  improve  short-term  cash  flow.  If
necessary,  the Company  may seek  additional  funding to support the  Company's
operating  strategy.  These  funding  requirements  may  result  in the  Company
incurring  long-term and  short-term  indebtedness  and in the public or private
issuance,  from time to time, of additional equity or debt securities.  Any such
issuance of equity may be dilutive to current  shareholders  and debt  financing
may impose  significant  restrictive  covenants on the Company.  There can be no
assurance  that any such  financing  will be available to the Company or will be
available on terms acceptable to the Company.

Accounting Pronouncements

     In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business  Combinations"  ("SFAS No. 141") and SFAS No. 142  "Goodwill and Other
Intangible  Assets"  ("SFAS No.  142") were issued by the  Financial  Accounting
Standards  Board  ("FASB").  Under SFAS No.  141,  only the  purchase  method of
accounting is permitted for business combinations initiated after June 30, 2001.
Under SFAS No. 142,  goodwill  and  indefinite  lived  intangible  assets are no
longer amortized but are reviewed annually for impairment.  Separable intangible
assets  that are not  deemed  to have an  indefinite  life will  continue  to be
amortized over their useful lives. The  amortization  provisions of SFAS No. 142
apply to goodwill and  intangible  assets  acquired  after June 30,  2001.  With
respect to goodwill and  intangible  assets  acquired prior to July 1, 2001, the
Company  will apply the new  accounting  rules  beginning  August 1,  2002.  The
Company is currently  assessing the financial  impact that SFAS No. 141 and SFAS
No. 142 will have on its consolidated financial statements.  With respect to the
adoption of SFAS No.  142,  the Company  anticipates  that all of the  Company's
goodwill will no longer be amortized.  In addition, a goodwill impairment charge
may be  required  under  SFAS  No.  142's  new  impairment  guidance.  Any  such
impairment  charge may impact the  Company's  compliance  with its various  debt
covenants.

     In August 2001,  No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets"  ("SFAS  No.  144") was  issued by the  FASB.  SFAS No.  144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived



                                      -9-
<PAGE>

Assets and for  Long-Lived  Assets to Be  Disposed  Of" ("SFAS  No.  121"),  and
provides a single  accounting  model for  long-lived  assets to be disposed  of.
Although   retaining  many  of  the  fundamental   recognition  and  measurement
provisions of SFAS No. 121, SFAS No. 144 significantly changes the criteria that
would have to be met to  classify an asset as  held-for-sale.  SFAS No. 144 also
supersedes  the  provisions  of  Accounting  Principle  Board  Opinion  No.  30,
"Reporting  the  Results of  Operations--Reporting  the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and Transactions" with regard to reporting the effects of a disposal of a
segment of a business and will require  expected  future  operating  losses from
discontinued  operations  to be  displayed  in  discontinued  operations  in the
period(s) in which the losses are incurred. In addition,  more dispositions will
qualify for  discontinued  operations  treatment in the statement of operations.
The  provisions  of SFAS No.  144 are to be  applied  prospectively  and will be
effective  for the Company  beginning  August 1, 2002.  The Company is currently
assessing the financial  impact that SFAS No. 144 will have on its  consolidated
financial statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk


     As of July 31, 2001 and 2000, the Company had cash and cash equivalents and
short-term  investments  (including  restricted amounts) totaling $6,193,000 and
$788,000,  respectively.  The Company has assessed its  vulnerability to certain
market risks,  including  interest risk  associated  with financial  instruments
included in cash,  cash  equivalents,  and short-term  investments.  Declines in
interest  rates over time will  reduce  interest  income  from  these  financial
instruments, but the Company believes that its exposure to interest rate changes
has and will be  immaterial  due to the  short-term  nature  of these  financial
instruments.  At July 31, 2001 and 2000,  the Company had debt and capital lease
obligations that total $7,542,000 and $3,724,000,  respectively.  Except for its
$600,000  bank loan,  interest  rates on the  Company's  debt and capital  lease
obligations are fixed at the beginning of the repayment;  therefore, exposure to
changes in interest rates is limited to new financings. The interest rate of the
Company's bank loan fluctuates based on the prime rate of the lender, plus a set
incremental  interest  percentage above the prime rate. Due to the insignificant
amount of the Company's remaining obligations subject to variable interest rates
and the absence of  significant  adverse  fluctuations  in the prime  rate,  the
Company  believes that the exposure to interest rate changes is immaterial.  The
Company's  earnings and cash flow are subject to fluctuations  due to changes in
currency  rates  in  Canada.  Since  inception  however,  the  impact  of  these
fluctuations has been immaterial to the Company's earnings and cash flows.



                                      -10-
<PAGE>

ITEM 8. Financial Statements and Supplementary Data

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Shareholders
Sonus Corp.


     We have audited the accompanying  consolidated balance sheet of Sonus Corp.
as of July 31, 2001,  and the related  consolidated  statements  of  operations,
shareholders'  equity,  and cash flows for the year then  ended.  Our audit also
includes  the  financial  statement  schedule  for the year ended July 31,  2001
listed in the Index at Item 14 (a). These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sonus Corp. and
subsidiaries as of July 31, 2001, and the consolidated results of its operations
and its cash  flows for the year  then  ended,  in  conformity  with  accounting
principles  generally accepted in the United States.  Also, in our opinion,  the
related  financial  statement  schedule for the year ended July 31,  2001,  when
considered in relation to the 2001 basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.

     As discussed  in Notes 1 and 8 to the  consolidated  financial  statements,
during  the year  ended  July 31,  2001,  Sonus  Corp.  changed  its  method  of
accounting for revenue  recognition and the method of accounting for convertible
securities with beneficial conversion features.

                                                               Ernst & Young LLP



Seattle, Washington
November 9, 2001, except paragraph 2 of
Note 7, as to which the date is November 19, 2001


                                      -11-
<PAGE>


                    REPORT OF KPMG LLP, INDEPENDENT AUDITORS



The Board of Directors and Shareholders
Sonus Corp.


     We have audited the accompanying  consolidated balance sheet of Sonus Corp.
and subsidiaries as of July 31, 2000, and the related consolidated statements of
operations,  shareholders'  equity,  and cash flows for each of the years in the
two-year period ended July 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of Sonus Corp.
and  subsidiaries  as of July 31, 2000,  and the  consolidated  results of their
operations,  and their cash flows for each of the years in the  two-year  period
ended July 31, 2000 in conformity with accounting  principles generally accepted
in the United States of America.


                                    KPMG LLP


Portland, Oregon
November 13, 2000




                                      -12-
<PAGE>


                                  SONUS CORP.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                                       July 31,              July 31,
                                                                                         2001                  2000
                                                                                   ------------------    -----------------
     ASSETS
Current assets:
<S>                                                                                       <C>                   <C>
     Cash and cash equivalents                                                            $    1,317            $     788
     Restricted cash and cash equivalents                                                      3,870                  ---
     Restricted securities available for sale                                                  1,006                  ---
     Accounts receivable, net of allowance for doubtful
       accounts of $1,501 in 2001 and $3,691 in 2000                                           4,797                6,359
     Inventory, net                                                                            1,073                  952
     Prepaid expenses                                                                            665                  396
     Other receivables                                                                         2,419                1,497
                                                                                   ------------------    -----------------
                     Total current assets                                                     15,147                9,992

Property and equipment, net                                                                    6,357                8,090
Goodwill, net                                                                                 17,419               18,121
Covenants not to compete, net                                                                  1,142                1,557
Other assets                                                                                     234                   24
                                                                                   ------------------    -----------------
                                                                                          $   40,299           $   37,784
                                                                                   ==================    =================

     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                     $    8,382           $    5,200
     Customer deposits                                                                           378                  441
     Bank loans                                                                                  600                  ---
     Accrued payroll                                                                           1,889                1,643
     Other accrued liabilities                                                                 1,462                1,014
     Deferred revenues, current portion                                                        1,763                  246
     Capital lease obligations, current portion                                                  261                  289
     Long-term debt, current portion                                                           5,820                2,176
                                                                                   ------------------    -----------------
                       Total current liabilities                                              20,555               11,009

Deferred revenues, less current portion                                                          854                  ---
Capital lease obligations, less current portion                                                  201                  181
Long-term debt, less current portion                                                             660                1,078

Commitments and contingencies

Shareholders'equity:

     Series A convertible preferred stock, no par value per share, 2,666,666
          shares authorized, issued, and outstanding (liquidation preference
          of $21,240)                                                                         15,701               15,701
     Series B convertible preferred stock, no par
          value per share, 2,500,000 shares authorized,
          issued, and outstanding (liquidation preference
          of $11,461)                                                                         15,661                8,306
     Common stock, no par value per share, unlimited
          number of shares authorized, 6,156,164 issued
          and outstanding (6,098,706 at July 31, 2000)                                         9,095               16,470
     Notes receivable from shareholders                                                         (168)                 (93)
     Accumulated deficit                                                                     (22,055)             (14,696)
     Accumulated other comprehensive loss                                                       (205)                (172)
                                                                                   ------------------    -----------------
                       Total shareholders' equity                                             18,029               25,516
                                                                                   ------------------    -----------------
                                                                                          $   40,299           $   37,784
                                                                                   ==================    =================

</TABLE>
                   See accompanying notes to consolidated financial statements.
                                      -13-
<PAGE>
                                   SONUS CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                Years ended July 31,
                                                                 -------------------------------------------------------
                                                                     2001                2000                 1999
                                                                 --------------      --------------       --------------
Revenues:
<S>                                                              <C>                    <C>                  <C>
     Product                                                     $ 34,997               $37,252              $29,044
     Service                                                        4,539                 3,589                3,392
     Other                                                          9,398                 3,118                1,323
                                                                 --------------      --------------       --------------

Net revenues                                                       48,934                43,959               33,759
Costs and expenses:
     Cost of products sold                                         16,391                12,887               10,766
     Clinical expenses                                             19,904                19,494               17,406
     Provision for doubtful accounts                                  851                 2,691                  389
     General and administrative expenses                           13,248                 8,778                7,583
     Depreciation and amortization                                  3,921                 3,109                2,450
                                                               --------------      --------------       --------------
Total costs and expenses                                           54,315                46,959               38,594
                                                               --------------      --------------       --------------
Loss from operations                                               (5,381)               (3,000)              (4,835)

Other income (expense):
      Interest income                                                 105                   260                  261
      Interest expense                                               (357)                 (342)                (300)
      Other, net                                                      388                   (19)                 (10)
                                                               --------------      --------------       --------------

Loss before cumulative effect of change in
     accounting principle                                          (5,245)               (3,101)              (4,884)
Cumulative effect of change in accounting principle                (2,114)                  ---                  ---
                                                               --------------      --------------       --------------
Net loss                                                           (7,359)               (3,101)              (4,884)

Deemed dividends to preferred shareholder                          (7,355)                  ---                  ---
                                                               --------------      --------------       --------------
Net loss attributable to common shareholders                    $ (14,714)           $   (3,101)           $  (4,884)
                                                               ==============      ==============       ==============
Net loss per share of common stock (basic and diluted):

Loss per share before cumulative effect of change
      in accounting principle and deemed dividends to
      preferred shareholder                                     $   (0.86)           $    (0.51)           $   (0.80)

Cumulative effect of change in accounting principle                 (0.35)                  ---                  ---

Deemed dividends to preferred shareholder
                                                                    (1.20)                  ---                  ---
                                                                 --------------      --------------       --------------
Net loss attributable to common shareholders                    $   (2.41)           $    (0.51)           $   (0.80)
                                                                 ==============      ==============       ==============
Weighted average shares outstanding                                 6,111                 6,083                6,090

Pro  forma amounts, assuming the change in
     accounting principle was applied retroactively:

Net loss attributable to common shareholders                    $ (12,600)           $   (3,952)           $  (6,147)

Net loss per common share (basic and diluted)                   $   (2.06)           $    (0.65)           $   (1.01)

 See accompanying notes to consolidated financial statements
</TABLE>
                                      -14-
<PAGE>
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)
<TABLE>
<CAPTION>
                                                   Preferred stock - Series A       Preferred Stock - Series B     Common Stock
                                                 ------------------------------    ----------------------------   --------------
                                                   Shares         Amount             Shares          Amount      Shares    Amount
                                                   ------         ------             ------          ------      ------    ------

<S>                                               <C>             <C>               <C>             <C>         <C>       <C>
Balance at July 31, 1998                         2,666,666       $ 15,701               ---             ---     6,079,908 $ 14,615

Net Loss                                               ---            ---               ---             ---           ---      ---
   Foreign currency translation adjustment             ---            ---               ---             ---           ---      ---
Comprehensive loss                                     ---            ---               ---             ---           ---      ---

Proceeds from exercise of warrants                     ---            ---               ---             ---        39,799      248
Repurchase of common stock                             ---            ---               ---             ---       (10,680)     (90)
Repayment on shareholder notes                         ---            ---               ---             ---           ---      ---
Payment of cash in lieu of fractional shares           ---            ---               ---             ---            (1)     ---
Stock Options granted to non-employees                 ---            ---               ---             ---           ---      203
                                                 ---------       --------          --------        --------     --------- --------
Balance at July 31, 1999                         2,666,666         15,701               ---             ---     6,109,026   14,976
                                                 ---------       --------          --------        --------     --------- --------
Net Loss                                               ---            ---               ---             ---           ---      ---
  Foreign currency translation adjustment              ---            ---               ---             ---           ---      ---

Issuance of Series B convertible preferred stock       ---            ---         2,500,000           9,860           ---      ---

Amendment of terms of common stock warrants
  related to issuance of Series B convertible
  preferred stock                                      ---            ---               ---          (1,554)          ---    1,554

Repurchase of common stock                             ---            ---               ---             ---       (10,320)     (86)
Stock Options granted to non-employees                 ---            ---               ---             ---           ---       26
                                                 ---------       --------          --------        --------     --------- --------
Balance at July 31, 2000                         2,666,666         15,701         2,500,000           8,306     6,098,706   16,470
                                                 ---------       --------          --------        --------     --------- --------
Net Loss
  Foreign currency translation adjustment              ---            ---               ---             ---           ---      ---
  Unrealized loss on securities available for sale     ---            ---               ---             ---           ---      ---

Repurchase of common stock                             ---            ---               ---             ---        (9,000)     (75)

Issuance of common stock in connection
  with acquisition                                     ---            ---               ---             ---         6,458       16

Issuance of common stock upon exercise
  of stock options                                     ---            ---               ---             ---        60,000       75

Stock options granted to non-employees                 ---            ---               ---             ---           ---      (36)

Deemed dividends to preferred shareholder              ---            ---               ---           7,355           ---   (7,355)
                                                 ---------       --------         ---------        --------     --------- --------
Balance at July 31, 2001                         2,666,666       $ 15,701         2,500,000        $ 15,661     6,156,164 $  9,095
                === ====                         =========       ========         =========        ========     ========= ========
</TABLE>

======================================
<TABLE>
<CAPTION>
                                                 Shareholder                                                              Total
                                                   notes          Accumulated     Accumulated other     Comprehensive  Shareholders'
                                                 receivable        deficit       comprehensive loss     income (loss)     Equity
                                                 ----------       -----------    ------------------     -------------   -----------
<S>                                             <C>             <C>             <C>                    <C>           <C>
Balance at July 31, 1998                         $    (283)      $ (6,711)       $           (229)                    $    23,093

Net Loss                                               ---         (4,884)                    ---       $     (4,884)      (4,884)
   Foreign currency translation adjustment             ---            ---                      55                 55           55
                                                                                                        ------------
Comprehensive loss                                     ---            ---                     ---       $     (4,829)         ---
                                                                                                        ============

Proceeds from exercise of warrants                     ---            ---                     ---                             248
Repurchase of common stock                             ---            ---                     ---                             (98)
Repayment on shareholder notes                         190            ---                     ---                             190
Payment of cash in lieu of fractional shares           ---            ---                     ---                             ---
Stock Options granted to non-employees                 ---            ---                     ---                             203
                                                  ----------       -----------    ------------------                    ---------
Balance at July 31, 1999                               (93)       (11,595)                   (174)                    $    18,815
                                                  ----------       -----------    ------------------                    ---------
Net Loss                                               ---         (3,101)                    ---       $     (3,101)      (3,101)
  Foreign currency translation adjustment              ---            ---                       2                  2            2
                                                                                                        ------------
                                                                                                        $     (3,099)
                                                                                                        ============

Issuance of Series B convertible preferred stock       ---            ---                     ---                           9,860

Amendment of terms of common stock warrants
  related to issuance of Series B convertible          ---            ---                     ---                             ---
  preferred stock

Repurchase of common stock                             ---            ---                     ---                             (86)
Stock Options granted to non-employees                 ---            ---                     ---                              26
                                                  ----------       -----------    ------------------                    ---------
Balance at July 31, 2000                               (93)       (14,696)                   (172)                         25,516
                                                  ----------       -----------    ------------------                    ---------

Net Loss                                               ---        ( 7,359)                              $     (7,359)      (7,359)
  Foreign currency translation adjustment              ---            ---                     (24)               (24)         (24)
  Unrealized loss on securities available for sale     ---            ---                      (9)                (9)          (9)
                                                                                                        ------------
                                                                                                        $     (7,392)
                                                                                                        ============

Repurchase of common stock                             ---            ---                     ---                             (75)

Issuance of common stock in connection
  with acquisition                                     ---            ---                     ---                              16

Issuance of common stock upon exercise
  of stock options                                     (75)           ---                     ---                             ---

Stock options granted to non-employees                 ---            ---                     ---                             (36)

Deemed dividends to preferred shareholder              ---            ---                     ---                             ---

Balance at July 31, 2001                           $  (168)     $ (22,055)        $          (205)                       $ 18,029
                                                   =======      =========         ===============                        ========
</TABLE>
                                      -15-
<PAGE>
                                  SONUS CORP.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                                      Years ended July 31,
                                                                                   ------------------------------------------------
                                                                                       2001              2000            1999
                                                                                   ------------------------------------------------
Cash flows from operating activities:
<S>                                                                                     <C>              <C>              <C>
     Net loss                                                                           $ (7,359)        $ (3,101)        $ (4,884)
     Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
          Impairment of goodwill                                                              55              ---              ---
          Provision for doubtful accounts                                                    851            2,691              389
          Provision for slow-moving inventory                                                 78              ---              ---
          Depreciation and amortization                                                    3,921            3,109            2,450
          Compensation cost for options granted to non-employees                              10               26              203
          Deferred revenue                                                                   157              420              ---
          Cumulative effect of change in accounting principle                              2,114              ---              ---
          Changes in operating assets and liabilities:
               Accounts receivable                                                           722           (4,971)            (554)
               Other receivables                                                            (894)          (1,141)             172
               Inventory                                                                    (202)            (447)             560
               Prepaid expenses                                                             (267)             (56)             (59)
               Accounts payable                                                            3,189            1,431              557
               Customer deposits                                                             (63)            (130)              50
               Accrued payroll                                                               248              246              113
               Other accrued liabilities                                                     445             (128)          (1,278)
                                                                                   --------------    -------------   --------------
                    Net cash provided by (used in) operating activities                    3,005           (2,051)          (2,281)
                                                                                   --------------    -------------   --------------
Cash flows from investing activities:
     Investment in restricted acquisition funds                                           (4,885)             ---              ---
     Purchase of short-term investments                                                      ---          (11,001)             ---
     Sale of short-term investments                                                          ---           11,001            6,408
     Purchase of property and equipment                                                     (568)          (3,305)          (3,368)
     Additional costs related to acquisitions                                               (211)             ---             (188)
     Deferred acquisition costs and other, net                                               ---               37               88
     Net cash paid for business acquisitions                                                (177)            (438)          (2,062)
                                                                                   --------------    -------------   --------------
               Net cash provided by (used in) investing activities                        (5,841)          (3,706)             878
                                                                                   --------------    -------------   --------------
Cash flows from financing activities:
    Advances of long-term debt and capital lease obligations                               5,287                1              330
    Repayments of long-term debt and capital lease obligations                            (2,372)          (3,237)          (1,956)
    Deferred financing costs, net                                                            (10)             ---                3
    Advances of bank loans and short-term notes payable                                      600              ---              500
    Repayments of bank loans and short-term notes payable                                    ---             (500)             (46)
    Repayments from (advances to) shareholders                                               (75)             ---              190
    Issuance of common stock, net of costs                                                    29              ---              248
    Issuance of preferred stock, net of costs                                                ---            9,860              ---
    Repurchase of common stock                                                               (75)             (86)             (90)
                                                                                   --------------    -------------   --------------
               Net cash provided by (used in) financing activities                         3,384            6,038             (821)
                                                                                   --------------    -------------   --------------

Net increase (decrease) in cash and cash equivalents                                         548              281           (2,224)
Effect on cash and cash equivalents of changes in foreign translation rate                   (19)               9                2
Cash and cash equivalents, beginning of period                                               788              498            2,720

                                                                                      --------------    -------------   ------------
Cash and cash equivalents, end of period                                                 $ 1,317            $ 788            $ 498
                                                                                      ==============    =============   ============
Supplemental disclosures:
     Interest paid during the period                                                       $ 352            $ 353            $ 218
     Non-cash investing and financing activities:
       Issuance and assumption of long-term debt in acquisitions                             393              573            2,611
       Issuance of common stock on exercise of options
       through shareholder loan                                                               75              ---              ---
       Issuance of common stock upon conversion of convertible note                          ---              ---              650
       Issuance of common stock in acquisitions                                               16              ---              ---
       Deemed dividends to preferred shareholder                                           7,355              ---              ---
       Acquisition of clinical and computer equipment with capital
       lease obligations                                                                     282              566              ---
       Notes receivable created from business sale                                           218              ---              ---

         See accompanying notes to consolidated financial statements.
</TABLE>

                                      -16-
<PAGE>

                                   Sonus Corp.

                   Notes to Consolidated Financial Statements
                             July 31, 2001 and 2000

Note 1.  Summary of Significant Accounting Policies

   Description of Company

     Sonus Corp., a Yukon Territory, Canada corporation (the "Company"), through
its primary  operating  subsidiaries,  Sonus-Canada  Ltd.,  a British  Columbia,
Canada  corporation,  Sonus-USA,  Inc., a Washington  corporation,  Sonus-Texas,
Inc., an Oregon corporation, and Sonus Acquisition Corp., an Oregon corporation,
owns and  operates  104 hearing  care  centers in the United  States and Western
Canada. The centers are located in the states of Arizona, California,  Illinois,
Michigan,  Missouri,  New Mexico,  Oregon,  Texas,  and  Washington,  and in the
Canadian  provinces  of British  Columbia  and  Alberta.  Each of the  Company's
hearing care centers provides its hearing  impaired  customers with a full range
of  audiological  products and  services.  The Company  also  operates a network
licensing program, The Sonus Network, with over 900 current locations. Licensees
are entitled to use the Sonus name and receive  other  benefits such as practice
management advice and training,  group buying discounts, and marketing services.
The Company,  through its subsidiary  Hear PO Corp.,  a New Mexico  corporation,
obtains  contracts to provide  hearing care  benefits to managed care groups and
corporate health care organizations  through its approximately  1,400 affiliated
hearing centers and sells Hear PO brand private label hearing instruments.

   Principles of Consolidation

     The consolidated  financial  statements  include the Company's wholly owned
subsidiaries. All significant inter-company accounts have been eliminated.

   Revenue Recognition

     The  Company  recognizes  revenue  from  the  sale  of  hearing  instrument
products, diagnostic hearing services, and other sources as follows:


Products:  Revenue from the sale of hearing instrument products is recognized at
the time of delivery of the hearing  instrument  product and  acceptance  by the
patient.  Amounts  received  in  advance of the  delivery  of the  products  are
recorded  as  customer  deposits.  Revenue  from the sale of hearing  instrument
products  under  contracts  with managed care groups and  corporate  health care
organizations  is  recognized  at the time of  delivery  and  acceptance  by the
patient at the contracted rates.


Services:  Revenue from  diagnostic  hearing care  services is recognized at the
date the service is performed.  Under certain product sales the patients receive
the right to future hearing care and diagnostic services and free batteries. The
Company defers revenue  related to these  obligations  based on their fair value
and recognizes such revenue over one to three years,  the period the obligations
are  discharged.  Any discount  associated  with the bundled product and service
arrangements is allocated to products.


The Company  also acts as a third  party  administrator  and  submits  claims on
behalf of  service  providers  under  contracts  with  managed  care  groups and
corporate  health care  organizations.  Revenue  from  administering  providers'
claims is  recognized  when claims are  processed and submitted to the insurance
carrier and repaid to the providers.

Other:  Revenue related to revenue  sharing  agreements with respect to supplier
sales to members of The Sonus Network is recognized when the hearing  instrument
product is shipped to the member.  Such  revenue is also  reduced by a provision
for estimated returns as members may return hearing  instrument  products to the
supplier and obtain a full refund.  The provision for estimated returns is based
upon historical  product return rates.  Hearing  instruments sold by the Company
are  covered by  manufacturers'  warranties.  In  addition,  the  Company  sells
extended  manufacturer  warranties  on  the  hearing  instruments  to  patients.
Extended  warranty  revenue is deferred and


                                      -17-
<PAGE>



recognized  over the  one-year  term of the  warranties.  The  Company  does not
receive any initial or continuing  licensing fees from licensees who are members
of The Sonus  Network.  Consequently,  no revenue is  recorded  related to these
activities.


     The Company  estimates the necessary  contractual  allowances in the period
hearing  instrument  products  are  sold and  diagnostic  hearing  services  are
provided  to reduce  gross  product  and service  revenue to the  estimated  net
realizable  amounts  due  from  patients,  commercial  insurance  carriers,  and
government  agencies.  Gross product  revenue is also reduced by a provision for
estimated  sales  returns at the time of sale as  customers  may return  hearing
instrument  products  to the  Company and obtain a full refund up to 60 days (75
days for certain models) after the date of purchase. In general, the Company can
return  hearing  instruments  returned  by  customers  within the return  period
allowed by the Company to the manufacturer for a full refund.  Due to the use of
estimates in establishing  contractual  allowances and the sales returns reserve
there is at least a  reasonable  possibility  that the  recorded  estimates  for
contractual  allowances and the sales returns  reserve will change by a material
amount in the near future. The contractual  allowances and sales returns reserve
are adjusted in future  periods,  as final  settlements  with third  parties are
determined.

     During the fourth  quarter of the year  ended July 31,  2001,  the  Company
changed  its method of  accounting  retroactively  to August 1,  2000.  Based on
guidance provided in Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), the
Company  concluded that when a sale of a hearing  instrument is coupled with the
performance  of future  services  or  obligations  for free  batteries,  revenue
related to the fair value of the  obligations  should be deferred and recognized
as revenue as the  obligations are discharged.  The Company's  previous  revenue
recognition  policy  was to  recognize  all  revenue  on  the  sale  of  hearing
instruments,  including post-sales services,  at the time the hearing instrument
was  delivered  and to accrue  the cost of  estimated  battery  replacement.  In
accordance  with SAB 101, the Company  recorded a non-cash  charge of $2,114,000
(or $0.35 per share,  basic and diluted) to reflect the cumulative effect of the
change as of August 1, 2000.  Revenue of $1,313,000  included in the  cumulative
effect was  recognized as revenue in the year ended July 31, 2001.  For the year
ended July 31, 2001,  the increase to net loss before the  cumulative  effect of
the change in  accounting  principle  as a result of the adoption of SAB 101 was
$6,000. The pro forma amounts shown on the consolidated statements of operations
are  presented  as if the  new  revenue  recognition  policy  had  been  applied
retroactively for all periods presented.

   Income Taxes

     The Company accounts for income taxes under Financial  Accounting Standards
Board ("FASB")  Statement of Financial  Accounting  Standards  ("SFAS") No. 109,
"Accounting  for Income  Taxes." SFAS No. 109 requires the use of the  liability
method in determining  income tax expense.  Deferred tax assets and  liabilities
are  recognized  for the future tax  consequences  attributable  to  differences
between  the  financial  statement  carrying  amounts  of  existing  assets  and
liabilities  and their  respective  tax bases and operating  loss and tax credit
carryforwards.  A valuation  allowance is  established  when necessary to reduce
deferred tax assets to the amount expected to be realized.

   Cash and Cash Equivalents and Restricted Cash

     Cash  equivalents  consist of short-term,  highly liquid  investments  with
original  maturities of 90 days or less. At July 31, 2001, the use of $3,870,000
of cash and cash  equivalents  was  restricted  to  acquisition  of hearing care
practices  under the terms of a credit  agreement.  See Note 7, Lines of Credit.
The Company had no restricted cash and cash equivalents at July 31, 2000.


                                      -18-
<PAGE>

Restricted Securities Available for Sale

     Securities available for sale are stated at fair value.  Unrealized holding
gains  and  losses  are  reflected  as  a  net  amount  in   accumulated   other
comprehensive loss until realized.  At July 31, 2001,  unrealized holding losses
of the Company's  available-for-sale  securities were $9,000.  At July 31, 2000,
the Company had no short-term  investments.  Gross  realized gains and losses on
sales of available-for-sale  securities for the years ended July 31, 2001, 2000,
and 1999 were  nominal.  Realized  gains and losses are computed by  determining
cost on a  specific  identification  basis.  At July  31,  2001,  the  Company's
restricted securities  available-for-sale  consisted of a commercial medium term
note in the amount of  $1,006,000  with a  contractual  maturity date of October
2001,  the use of which  was  restricted  to the  acquisition  of  hearing  care
practices under the terms of a credit agreement. See Note 7, Lines of Credit.

     Gross proceeds from sales and maturities of available-for-sale  investments
during the years ended July 31, 2001, 2000, and 1999 were $0,  $11,001,000,  and
$6,408,000, respectively.

   Accounts Receivable

     The Company  establishes  the  allowance  for  doubtful  accounts  based on
historical collections of accounts receivable and other factors. During the year
ended July 31, 2000, the Company  increased the allowance for doubtful  accounts
by $2,300,000 through a charge to income. The increase was considered  necessary
based on management's  review and assessment of the underlying detail supporting
receivables, information system issues, discontinuance of the normal billing and
collections  process  to meet a  financing  obligation  instead of  focusing  on
collecting  receivables,  and  changes in the  estimated  collectibility  of the
receivables at July 31, 2000.

   Inventory

     Inventory  primarily  consists of hearing  instruments,  hearing instrument
batteries,  and assistive  listening  devices and is stated at the lower of cost
(first in, first out) or net  realizable  value.  Inventory at July 31, 2001, is
recorded net of a $78,000 reserve for slow-moving  inventory.  There was no such
reserve at July 31, 2000.

   Property and Equipment

     Property  and  equipment  are  recorded at cost and  depreciated  using the
straight-line method over the following useful lives:

           Professional equipment                           Seven years
           Office equipment                                 Five years
           Computer equipment and software                  Five years

     Property and equipment  purchased  under  capitalized  leases and leasehold
improvements are amortized over the shorter of the lease term or their estimated
useful  lives and such  amortization  is  included  with  depreciation  expense.
Depreciation  expense was $2,429,000,  $1,723,000,  and $1,255,000 for the years
ended July 31, 2001, 2000, and 1999, respectively.


                                      -19-
<PAGE>

   Advertising Expense

     The  Company  defers  its  advertising  costs  until the  advertisement  is
actually released or the advertised event occurs, at which time the full expense
is recognized.  Deferred advertising costs were $251,000 and $60,000 at July 31,
2001 and 2000, respectively. Advertising expense was $5,708,000, $4,004,000, and
$3,632,000 for the years ended July 31, 2001, 2000, and 1999, respectively.

   Goodwill and Covenants Not to Compete

     The  unallocated  purchase  costs in excess of the fair value of net assets
acquired  (goodwill)  is  amortized  on the  straight-line  basis over 20 years.
Goodwill as of July 31 was as follows (in thousands):

                                                   2001        2000
                                                   ----        ----

            Goodwill                           $  21,336     $  20,970
            Less:  Accumulated amortization       (3,917)       (2,849)
                                                  ------        ------
                                               $  17,419     $  18,121

     Costs allocated to non-compete agreements,  based principally on underlying
contract  terms,  are  amortized  on the  straight-line  basis  over the  period
benefited of three to nine years. Covenants not to compete as of July 31 were as
follows:

                                                    2001        2000
                                                    ----        ----

            Covenants not to compete             $  2,274    $  2,311
            Less:  Accumulated amortization        (1,132)       (754)
                                                    -----       -----

                                                 $  1,142    $  1,557
                                                    =====       =====

     Amortization   for  goodwill  and  covenants  not  to  compete  charged  to
operations was $1,492,000,  $1,386,000,  and $1,195,000 for the years ended July
31, 2001, 2000 and 1999, respectively.

   Impairment of Long-Lived Assets

     The Company assesses the  recoverability  of long-lived  assets,  including
goodwill,  by determining  whether the carrying  amount of the long-lived  asset
over its remaining life can be recovered through  undiscounted  projected future
cash  flows.  If this  review  indicates  that  long-lived  assets  will  not be
recoverable,  the  carrying  amount of the  long-lived  assets is reduced by the
estimated   shortfall  of  cashflows.   The  evaluation   necessarily   involves
significant management judgment.

   Net Loss Per Share

     Basic  net  loss  per  share  is  computed  by  dividing  net  loss  by the
weighted-average number of common shares outstanding for the period. Diluted net
loss per share reflects the dilutive effect of common stock equivalents, if any.
Other common stock equivalents,  including convertible preferred stock and notes
payable, stock options, and warrants, are excluded from the computation as their
effect is anti-dilutive.  The following common share equivalents,  as of the end
of each year  presented,  have been excluded from the computation of diluted net
loss per share for the years ended July 31,  2001,  2000,  and 1999  because the
effect would have been anti-dilutive:

                                                       Years Ended July 31,
                                                      2001     2000     1999
                                                      ----     ----     ----
                                                          (in thousands)
Shares   issuable   under   stock   options  and
warrants........................................      5,706     4,574   4,108
Shares  issuable upon  conversion of convertible
notes payable...................................        ---       ---     143
Shares of convertible  preferred  stock on an as
converted basis.................................      6,617     5,167   2,667


                                      -20-
<PAGE>


   Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income (loss), foreign currency
translation adjustment, and unrealized loss on securities available for sale and
is presented in the consolidated statement of shareholders' equity.

   Stock Based Compensation

     As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation",  the
Company has elected to continue to apply  Accounting  Principles  Board  Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees",  which prescribes an
intrinsic  value based method of accounting for stock plans  covering  employees
and to provide the pro forma  disclosures  of the effects of SFAS No. 123 on net
income (loss) and net income (loss) per share.

   Concentrations of Credit Risk

     Financial   instruments,   which   potentially   subject   the  Company  to
concentration of credit risk, consist  principally of cash and cash equivalents,
restricted cash, securities available for sale, and trade and other receivables.
The Company  places its cash with high credit  quality  institutions.  At times,
such  amounts  may be in excess of the  Federal  Deposit  Insurance  Corporation
insurance  limits.  Short-term  investments  are  maintained  in  highly  liquid
investments with short  contractual  terms to mitigate credit and market losses.
The  Company's  trade  accounts  receivable  are derived from  numerous  private
payors, insurance carriers, managed care organizations, and government agencies.
Concentration  of credit risk relating to trade  accounts  receivable is limited
due to the  diversity  and number of  customers  and payors.  Other  receivables
represent credits due from supply vendors.  Management believes the risk of loss
related to vendor  receivables is limited due to the financial  viability of the
vendors.  The Company  typically  requires  customers to provide a deposit for a
portion of the hearing instrument purchase price at the date of sale.

   Fair Value of Financial Instruments

     The  carrying  value  of  financial  instruments  such  as  cash  and  cash
equivalents,   restricted  cash  and  cash   equivalents,   accounts  and  other
receivables,  accounts  payable,  and bank  loans  approximate  their fair value
because  of the  short-term  nature  of these  instruments.  The fair  values of
securities  available for sale are based on quoted market  prices.  The carrying
amounts  of  the  Company's   long-term  debt  and  capital  lease   obligations
approximates  fair value because the interest rates  approximate  the rates that
management believes are currently available to the Company.

   Accounting Pronouncements

     In June 2001, SFAS No. 141,  "Business  Combinations"  ("SFAS No. 141") and
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued
by the FASB.  Under SFAS No. 141,  only the  purchase  method of  accounting  is
permitted for business  combinations  initiated after June 30, 2001.  Under SFAS
No. 142, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment.  Separable  intangible assets that are
not deemed to have an indefinite  life will continue to be amortized  over their
useful lives. The amortization  provisions of SFAS No. 142 apply to goodwill and
intangible  assets  acquired  after June 30, 2001.  With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting  rules beginning  August 1, 2002. The Company is currently  assessing
the  financial  impact  that  SFAS No.  141 and SFAS  No.  142 will  have on its
consolidated financial statements. With respect to the adoption of SFAS No. 142,
the Company  will no longer  amortize  its recorded  goodwill.  In  addition,  a
goodwill  impairment  charge may be required under SFAS No. 142's new impairment
guidance.  Any such impairment  charge may impact the Company's  compliance with
its various debt covenants.


                                      -21-
<PAGE>



     In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued by the FASB. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and provides a single  accounting model for long-lived assets to
be disposed of.  Although  retaining  many of the  fundamental  recognition  and
measurement  provisions of SFAS No. 121, SFAS No. 144 significantly  changes the
criteria that would have to be met to classify an asset as  held-for-sale.  SFAS
No. 144 also supersedes the provisions of APB No. 30,  "Reporting the Results of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions" with
regard to  reporting  the effects of a disposal  of a segment of a business  and
will require expected future operating losses from discontinued operations to be
displayed  in  discontinued  operations  in the  period(s)  which the losses are
incurred.   In  addition,   more  dispositions  will  qualify  for  discontinued
operations treatment in the statement of operations.  The provisions of SFAS No.
144 are to be  applied  prospectively  and  will be  effective  for the  Company
beginning  August 1, 2002.  The Company is  currently  assessing  the  financial
impact that SFAS No. 144 will have on its consolidated financial statements.

   Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that affect the reported  amounts in the  financial
statements and accompanying notes.

   Reclassifications

     Certain  amounts have been  reclassified  for the years ended July 31, 2000
and 1999 to conform to the presentation used for the year ended July 31, 2001.

Note 2.  Operational Matters

     The Company's  business has grown  significantly over the past three years.
Concurrent  with that  growth,  the  Company  has also  experienced  significant
problems with its information systems which, to a large extent, have resulted in
material bad debt expense or revenue adjustments that have contributed to losses
of $5,245,000 (before the cumulative effect of a change in accounting principle)
and $3,101,000 for the years ended July 31, 2001 and 2000, respectively. At July
31, 2001, the Company has an accumulated deficit of $22,055,000. In addition, at
July 31, 2001, the Company was in violation of certain  covenants under its line
of credit  agreements and has certain  commitments  and  contingencies  that may
adversely impact its cash flow and operating  results if settled  unfavorably to
the  Company.  See  Note 7,  Lines  of  Credit  and  Note  12,  Commitments  and
Contingencies.

     During the year ended July 31, 2001,  the Company  implemented  a number of
operational  initiatives  designed  to  improve  profitability  and  cash  flow,
including hiring new senior  management,  increasing the number of reimbursement
employees,  limiting  expansion of Company-owned  hearing care centers,  rapidly
expanding  The Sonus  Network,  and  executing a new hearing  instrument  supply
contract and financing  arrangement with a key product  supplier.  The Company's
management  continues to focus on improving the Company's cash position  through
collection of accounts receivable,  enhancing information systems, and improving
operating profits at hearing centers.

     The  Company's  ability to generate  net cash from  operations  will depend
heavily on its  ability  to collect  existing  accounts  receivable  in a timely
manner.  Notwithstanding this, the Company believes that its cash and short-term
investments  and cash generated from  operations  will be sufficient to meet its
anticipated  cash needs for working  capital and  capital  expenditures  through
August 1, 2002.  The Company also  believes that it can reduce  expenditures  or
obtain support from its major  shareholder to improve  short-term  cash flow. If
necessary,  the Company  may seek  additional  funding to support the  Company's
operating  strategy.  These  funding  requirements  may  result  in the  Company
incurring  long-term and  short-term  indebtedness  and in the public or private
issuance,  from time to time, of additional equity or debt securities.  Any such
issuance of equity may be dilutive to current  shareholders  and debt  financing
may  impose  significant  restrictive  covenants  on the  Company.  However,  no
assurance  can be  given  that  the  Company  will be  successful  in  achieving
continued  positive cash flow from  operations or that it will favorably  settle
its commitments and contingencies.

                                      -22-
<PAGE>


Note 3.  Acquisitions

     During the fiscal  year ended July 31,  2001,  the Company  acquired  eight
hearing  care  centers in eight  separate  transactions.  Each  transaction  was
accounted for as a purchase.  The acquired assets and liabilities  were recorded
at their estimated fair values at the date of  acquisition,  and the goodwill is
being amortized on a straight-line basis over 20 years. The operating results of
each acquisition have been included in the consolidated statements of operations
from the  respective  acquisition  date.  The aggregate  purchase  price for the
acquisitions consisted of cash payments of $177,000,  promissory notes issued by
the Company of $393,000  generally  payable over three years,  $16,000 in common
stock (6,458  shares),  and $12,000 in assumed  liabilities.  As a result of the
acquisitions,  the Company  recorded  approximately  $141,000  in  property  and
equipment,  $15,000 in other  assets,  $402,000  in  goodwill,  and  $40,000 for
covenants not to compete.

     During the year ended July 31, 2000,  the Company  acquired 16 hearing care
centers in 10  transactions.  Each  transaction was accounted for as a purchase.
The acquired assets and liabilities were recorded at their estimated fair values
at  the  date  of  acquisition,  and  the  goodwill  is  being  amortized  on  a
straight-line  basis over 20 years.  The operating  results of each  acquisition
have  been  included  in the  consolidated  statements  of  operations  from the
respective  acquisition date. The aggregate  purchase price for the acquisitions
consisted of cash payments of $438,000,  promissory  notes issued by the Company
of  $521,000  generally  payable  over  three  years,  and  $85,000  in  assumed
liabilities. As a result of the acquisitions, the Company recorded approximately
$6,000 in  inventory,  $157,000  in  property  and  equipment,  $10,000 in other
assets, $795,000 in goodwill, which included costs related to acquisitions,  and
$85,000 for covenants not to compete.

     During the fiscal year ended July 31, 1999, the Company acquired 31 hearing
care  centers  in 17  transactions.  Each  transaction  was  accounted  for as a
purchase.  The acquired assets and liabilities  were recorded at their estimated
fair values at the date of acquisition, and the goodwill is being amortized on a
straight  line basis over 20 years.  The operating  results of each  acquisition
have  been  included  in the  consolidated  statements  of  operations  from the
respective  acquisition date. The aggregate  purchase price for the acquisitions
consisted of cash payments of $1,704,000, promissory notes issued by the Company
of  $1,749,000  generally  payable  over three  years,  and  $900,000 in assumed
liabilities. As a result of the acquisitions, the Company recorded approximately
$95,000 in accounts receivable,  $90,000 in inventory,  $457,000 in property and
equipment,  $20,000 in other assets, and $3,700,000 in goodwill,  which included
costs  related  to  acquisitions.  In  addition  to the  purchase  price for the
acquisitions,  the Company also recorded  $299,000 for covenants not to compete,
of  which  $79,000  was paid in cash at the time of  closing,  with the  balance
payable over three years.

     The  following  unaudited  pro forma  financial  information  reflects  the
historical  operations  of the Company and the hearing care centers  acquired by
the  Company  during  the  fiscal  years  ended  July 31,  2001  and  2000  (the
"Acquisitions") as if the acquisitions occurred at the beginning of each period.
Such financial  information has been prepared for comparative  purposes only and
is not necessarily  indicative of the Company's  combined  financial position or
the results of operations that actually would have occurred if the  Acquisitions
had been  consummated  on August 1, 1999. In addition,  such  information is not
intended to be a projection of results of operations that may be obtained by the
Company in the future.



                                                        Year Ended July 31,
                                                         -------------------
                                                           (Unaudited)
          (in thousands,
         except per share amounts)                         2001       2000
                                                           ----       ----
         Net revenues                                    $50,274    $50,040
         Loss before  cumulative  effect of
         change in accounting principle                   (5,014)    (2,451)
         Net loss                                         (7,128)    (2,451)
         Net loss  attributable  to common shareholders  (14,483)    (2,451)


                                      -23-
<PAGE>


         Per   share   data   (basic   and
         diluted):
         Loss before  cumulative effect of
         change in accounting principle                    (0.82)     (0.40)
         Net loss                                          (1.17)     (0.40)
         Net loss  attributable  to common shareholders    (2.37)     (0.40)


Note 4.  Property and Equipment

 Property and equipment consist of the following as of July 31 (in thousands):

                                                    2001         2000
                                                    ----         ----

             Professional equipment....           $2,816        $2,695

             Office equipment..........            1,200         1,155

             Leasehold improvements....            1,623         1,599

             Computer equipment and software..     7,317         6,941
                                                  ------        ------
                                                  12,956        12,390
             Less accumulated depreciation and
             amortization..............           (6,599)       (4,300)
                                                  ------        ------
                                                  $6,357        $8,090
                                                  ======        ======

Note 5.  Capital Leases

     The following is a schedule by year of future  minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of July 31, 2001 (in thousands):

  2002......................................................$301
  2003......................................................  63
  2004......................................................  60
  2005......................................................  58
  2006......................................................  57
                                                            ----
Total minimum lease payments                                 539
     Less:  amount representing interest.................... (77)
                                                            ----
     Present value of minimum lease payments................ 462
     Less current portion...................................(261)
                                                            ----
                                                            $201
                                                            ====

Total assets under capitalized leases at July 31, 2001 and 2000, which consisted
primarily of professional and computer equipment,  were $818,000 and $1,035,000.
Accumulated  depreciation  on the leased assets as of July 31, 2001 and 2000 was
approximately $316,000 and $573,000, respectively.

                                      -24-
<PAGE>


Note 6.  Long-term Debt

      Long-term debt consists of the following as of July 31 (in thousands):
<TABLE>
<CAPTION>

                                                                                         2001              2000
                                                                                         ----              ----
<S>                                                                                <C>                  <C>
      Acquisition line of credit from a supplier with an interest rate of 6%
      due 2008, secured by certain assets.  See Note 7, Lines of Credit              $   5,000            $ ---

      Installment notes incurred in connection with acquisitions payable in
      monthly installments through 2003 with a weighted average interest rate of
      7.0%, partially secured by purchased assets                                          129              292

      Installment notes incurred in connection with acquisitions payable in
      quarterly installments through 2004 with a weighted average interest rate
      of 6.8%, partially secured by purchased assets                                        90              249

      Installment notes incurred in connection with acquisitions payable in
      annual installments through 2005 with a weighted average interest rate of
      6.5%, partially secured by purchased assets                                        1,115            1,733

      Non-interest bearing installment obligations for covenants not to compete
      through 2003 (net of discount of $10), partially
      secured by assets purchased in related acquisitions                                   51              350

      Equipment loans from suppliers with interest rates from 7.8% to 18% per
      annum through 2003, secured by equipment                                              95              299

      Working capital loan from a supplier repaid in 2001                                  ---              331
                                                                                     ---------          -------
                                                                                         6,480            3,254
       Less current portion                                                             (5,820)          (2,176)
                                                                                     ---------          -------
                                                                                      $    660        $   1,078
                                                                                      ========        =========
</TABLE>


Annual maturities of long-term debt are as follows (in thousands): 2002 -
$5,820; 2003 - $467; 2004 - $108; 2005 - $51; 2006 - $34.

Note 7.  Lines of Credit


     In  July  2000,  Sonus-USA,  Inc.  and  Sonus-Texas,  Inc.  entered  into a
$2,000,000  revolving line of credit agreement with a commercial bank, U.S. Bank
National Association.  The line of credit matures on December 3, 2001, and bears
interest  at the bank's  prime rate plus 0.5%,  or 7.25% at July 31,  2001.  The
amount available for borrowing under the line of credit was $1,400,000. The line
of credit is secured by all accounts  receivable,  inventory,  chattel paper and
general intangibles of Sonus-USA, Inc. and Sonus-Texas,  Inc. The line of credit
requires  the  Company  to  comply  with  certain  financial  and  non-financial
covenants.  At July 31, 2001, the Company was in violation of certain  financial
covenants under the line of credit relating to its net worth, current ratio, and
earnings before interest, taxes,  depreciation,  and amortization.  As a result,
the unpaid balance of $600,000 was  immediately  due and payable.  However,  the
bank has  waived  compliance  with such  covenants  and has  agreed to allow the
Company to repay the  outstanding  balance  after  maturity by making an initial
payment of  $150,000 on December 3, 2001,  and  subsequent  monthly  payments of
$100,000 until the amount owing has been paid in full.


     On May 31,  2001,  Sonus-USA,  Inc.  entered into a credit  agreement  (the
"Credit  Agreement")  with an affiliate of one of the  Company's  major  hearing
instrument  suppliers.  The Credit  Agreement,  which has a term of seven years,
provides for borrowings up to $20,000,000  for the purpose of acquiring  hearing
care practices. Borrowings

                                      -25-
<PAGE>


bear  interest  at 6% and may be  made  until  May 31,  2006.  No  repayment  of
principal is required during the first two years of the Credit  Agreement ending
May 31, 2003,  after which  repayments  of principal  equal to 20% of the unpaid
principal amount existing as of the immediately  preceding May 31 are due during
each year ending May 31, 2004,  2005,  2006,  2007, and 2008, when the remaining
balance is due in full. As of July 31, 2001,  amounts  outstanding and available
under the  Credit  Agreement  were  $5,000,000  and  $15,000,000,  respectively.
Sonus-USA,  Inc.  has  pledged  as  security  for  borrowings  under the  Credit
Agreement all accounts,  inventory,  general  intangibles,  chattel  paper,  and
interests in  subsidiaries  formed to hold assets  acquired with the proceeds of
borrowings   ("Acquisition   Subsidiaries").   In  addition,   such  Acquisition
Subsidiaries  have  pledged as  security  all  inventory,  general  intangibles,
documents, instruments, equipment, investment property, collateral accounts, and
books and records  (including  customer  lists)  acquired  with the  proceeds of
borrowings.  The line of credit  requires  the  Company to comply  with  certain
financial  and  non-financial  covenants.  At July 31, 2001,  the Company was in
violation of leverage ratio and fixed charge  coverage ratio covenants under the
Credit Agreement.  As a result,  the entire  $5,000,000  balance was immediately
payable and is classified as short-term at July 31, 2001.  The Credit  Agreement
was amended on November 19, 2001, to bring the Company into compliance with such
covenants.  However,  there can be no  assurance  that the Company will meet the
covenants of the Credit  Agreement in the future.  See Note 12,  Commitments and
Contingencies.

Note 8.  Shareholders' Equity

   Series A Convertible Preferred Shares

     The  Company  has  2,666,666  Series A  Convertible  Preferred  Shares (the
"Series A Shares")  outstanding.  The following  summarizes certain terms of the
Series A Shares:

     Voting  Rights.  Each Series A Share is entitled to one vote (or such other
number of votes  equal to the number of Common  Shares  into which such Series A
Share shall be  convertible  from time to time) in the election of directors and
any other  matters  presented to the  shareholders  of the Company for action or
consideration.

     Dividends.  Each Series A Share is entitled  to  receive,  when,  as and if
declared by the board of  directors of the Company out of the  Company's  assets
legally  available for payment,  cumulative  dividends from the date of original
issuance,  payable  annually at a rate of 5% per annum on a base amount of $6.75
per share  (the  "Base  Amount").  As of July 31,  2001,  cumulative  undeclared
dividends  amounted to  $3,240,000.  All accrued  and unpaid  dividends  will be
forfeited  upon the  conversion  of the Series A Shares.  The  dividend  rate is
subject to increase on specified dates in the event that certain conditions (the
"Triggering  Conditions")  have not been met. The  Triggering  Conditions are as
follows:

     (a) The  Common  Shares  are  listed on the New York  Stock  Exchange,  the
American Stock Exchange,  or the Nasdaq National Market (each a "U.S.  Principal
Market");

     (b) The  Common  Shares are  traded on a U.S.  Principal  Market at a daily
closing price greater than $8.00 per Common Share on each of the ten consecutive
trading days preceding the applicable date; and

     (c) The Company's net income before income taxes, dividends on the Series A
Shares,  and amortization of goodwill and covenants not to compete for the three
consecutive fiscal quarters preceding the applicable date shall have averaged at
least $0.22 per fully diluted  Common Share per fiscal  quarter (for purposes of
making  this  calculation,  the Common  Shares  issuable  upon the  exercise  of
warrants issued in connection with the Series A Shares will not be counted).

   If the Triggering Conditions have not been met by:

     (1) January 1, 2003, the dividend rate will  thereafter be 15% per annum of
the Base Amount;

                                      -26-
<PAGE>


     (2) January 1, 2004, the dividend rate will  thereafter be 18% per annum of
the Base Amount; or

     (3) January 1, 2005, the dividend rate will  thereafter be 21% per annum of
the Base Amount.

     As soon as the Triggering Conditions have been satisfied, the dividend rate
will revert to 5% per annum of the Base Amount.

     Liquidation  Preference.  In the  event  of any  voluntary  or  involuntary
liquidation, dissolution, or winding up of the Company and subject to the rights
of holders  of any  securities  of the  Company  ranking  senior to the Series A
Shares  upon  liquidation,  the  holders of Series A Shares  will be entitled to
receive,  out of the  assets  of  the  Company  available  for  distribution  to
shareholders,  before  any  distribution  of assets is made to holders of Common
Shares or any  other  securities  ranking  junior  to the  Series A Shares  upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$6.75 per share plus any  accrued and unpaid  dividends  or (ii) the amount that
would have been distributable to such holders if they had converted their Series
A Shares into Common Shares immediately prior to such dissolution,  liquidation,
or winding  up, plus any accrued  and unpaid  dividends.  The sale,  conveyance,
mortgage,  pledge or lease of all or substantially all the assets of the Company
will  be  deemed  to be a  liquidation  of  the  Company  for  purposes  of  the
liquidation rights of the holders of Series A Shares.  After payment of the full
amount of the liquidating  distribution to which they are entitled,  the holders
of  Series A Shares  will  have no right to any of the  remaining  assets of the
Company.

     Optional  Redemption.  The  Series  A  Shares  may not be  redeemed  before
December 24, 2002. Thereafter, the Series A Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  greater  of (i)  $6.75  per  share  plus any  accrued  and  unpaid
dividends or (ii) the fair market value of a Series A Share as  determined  by a
nationally  recognized  independent  investment  banking firm selected by mutual
agreement of the Company and the holder of a majority of the outstanding  Series
A Shares.  The Series A Shares are not subject to  mandatory  redemption  or any
sinking fund provisions.

     Conversion  Rights.  The Series A Shares may be converted  at any time,  in
whole or in part, at the option of the holder thereof,  into Common Shares.  The
conversion  rate is  presently  equal to one Common Share for every one Series A
Share  surrendered  for  conversion.  The conversion  rate is subject to further
adjustment  for stock  dividends,  stock  splits,  recapitalizations,  and other
anti-dilution  adjustments.  Upon the  conversion  of any  Series A Shares,  any
accrued and unpaid dividends with respect to such shares will be forfeited.  The
Company has the right to force conversion of the Series A Shares, in whole or in
part, upon satisfaction of certain conditions.

   Series B Convertible Preferred Shares

     The  Company  has  2,500,000  Series B  Convertible  Preferred  Shares (the
"Series B Shares")  outstanding.  The following  summarizes certain terms of the
Series B Shares:

     Voting Rights. Each Series B Share is entitled to the number of votes equal
to the  number  of  Common  Shares  into  which  such  Series  B Share  shall be
convertible from time to time (1.5800854  Common Shares at July 31, 2001) in the
election of directors and any other matters presented to the shareholders of the
Company for action or consideration.

     Dividends.  Cash  dividends will accrue on the Series B Shares at an annual
rate of 8% of the  conversion  price  then in effect  until  November  1,  2004,
increasing in steps thereafter to 18% beginning November 1, 2006,  provided that
the Company has met specified quarterly earnings targets. If the Company has not
met the  earnings  targets  by July 31,  2002,  dividends  will not accrue or be
payable  on the  Series B Shares.  As of July 31,  2001,  cumulative  undeclared
dividends  amounted to $1,461,000.  Upon conversion of the Series B Shares,  any
accumulated dividends will be forfeited.

     Liquidation  Preference.  In the  event  of any  voluntary  or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities of the Company  ranking senior to the Series B Shares
upon  liquidation,  the  holders of Series B Shares will be entitled to receive,
out of the assets of the Company

                                      -27-
<PAGE>



available for distribution to shareholders, before any distribution of assets is
made to holders of Common Shares or any other  securities  ranking junior to the
Series B Shares upon liquidation,  a liquidating distribution in an amount equal
to the conversion  rate then in effect  multiplied by (i) the  conversion  price
then in effect  plus any accrued  and unpaid  dividends  or (ii) the amount that
would have been distributable to such holders if they had converted their Series
B Shares into Common Shares immediately prior to such dissolution,  liquidation,
or winding up, plus any accrued and unpaid dividends,  whichever is greater. The
sale,  conveyance,  mortgage,  pledge or lease of all or  substantially  all the
assets of the  Company  will be deemed to be a  liquidation  of the  Company for
purposes  of the  liquidation  rights of the  holders of Series B Shares.  After
payment of the full  amount of the  liquidating  distribution  to which they are
entitled,  the  holders  of  Series  B Shares  will  have no right to any of the
remaining assets of the Company. The Company will be prohibited from paying cash
dividends to holders of Common  Shares unless the  accumulated  dividends on the
Series B Shares have been paid in full.

     Optional Redemption. The Series B Shares may not be redeemed before October
1, 2004.  Thereafter,  the Series B Shares may be  redeemed at the option of the
Company,  in whole or in part. The  redemption  price will be an amount equal to
the conversion rate then in effect  multiplied by (i) the conversion  price then
in effect plus any accrued and unpaid dividends or (ii) the fair market value of
a Series B Share as determined by a nationally recognized independent investment
banking  firm  selected by mutual  agreement  of the Company and the holder of a
majority of the outstanding Series B Shares,  whichever is greater. The Series B
Shares are not subject to mandatory redemption or any sinking fund provisions.

     Conversion  Rights.  Until  October  31,  2000,  the  Series B Shares  were
convertible  at the option of the holder on a one-for-one  basis into  2,500,000
Common Shares.  After October 31, 2000,  the  conversion  rate is required to be
adjusted  upward  each  fiscal  quarter  until  the  Company  attains  specified
quarterly earnings targets. The amount of such quarterly adjustments is based on
a  factor  of 2% of the  original  purchase  price  plus  the  sum of all  prior
adjustments  until  November 1, 2004,  increasing  in steps  thereafter  to 4.5%
beginning  November 1, 2006.  Once the Company  has met the  specified  earnings
targets for four  consecutive  fiscal  quarters,  no further  adjustments in the
conversion  rate will be made. The conversion rate is also subject to adjustment
for stock dividends, stock splits, recapitalizations,  and other similar events.
The Series B Shares are  subject to  mandatory  conversion  at the option of the
Company if certain share price and earnings targets are met. In addition, if the
Company failed to collect  certain  receivables by July 31, 2000, as required by
the terms of the Series B Shares, the conversion rate was subject to adjustment.

     The Emerging  Issues Task Force  ("EITF") of the FASB in its consensus EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently  Adjustable Conversion Ratios" ("EITF 98-5"),  provided guidance
regarding  the  accounting  for the  issuance  of  convertible  securities  with
non-detachable  conversion options and contingent conversion features. EITF 98-5
is applicable for all  transactions  issued after May 20, 1999. In its consensus
the EITF specified that no contingent  beneficial  conversion  feature was to be
recognized in earnings until the contingency is resolved.  During the year ended
July 31, 2000, the Company failed to collect certain  receivables as required by
the terms of the Series B Shares.  In addition,  as of and subsequent to October
31, 2000, the Company did not the meet  specified  quarterly  earnings  targets.
Because the  Company did not meet these  commitments,  the  conversion  rate was
adjusted  such that as of July 31,  2001,  the Series B Shares were  convertible
into 3,950,214  Common Shares.  Management  discovered  that the Company did not
appropriately apply the provisions of EITF 98-5 to record beneficial conversions
as the receivable  collection and earnings  target  contingencies  were resolved
during the year ended July 31, 2001. Accordingly,  the Company recorded a deemed
dividend to the holder of the Series B Shares in the amount of $5,801,000 in the
fourth quarter of fiscal 2001. This amount  increased the net loss applicable to
common shareholders (both basic and diluted) by $0.95 per share.

   Share Purchase Warrants

     In October 1999, in  connection  with the sale of the Series B Shares,  the
Company modified the terms of warrants to purchase  2,000,000 Common Shares that
had been issued in connection with the Series A Shares. The modification reduced
the  exercise  price of the  warrants  from $12 per share to $6.75 per share and
extended the term of the warrants to October 1, 2004.  The Company may force the
exercise of the warrants upon satisfaction of all the


                                      -28-
<PAGE>

Triggering Conditions, except that the Company's net income before income taxes,
dividends  on the  Series A Shares  and  Series B Shares,  and  amortization  of
goodwill and covenants not to compete for the three consecutive  fiscal quarters
preceding  the  applicable  date shall have  averaged at least $0.35  instead of
$0.22 per fully diluted Common Share per fiscal quarter.

     In November 2000, the EITF reached a consensus in EITF 00-27,  "Application
of Issue No. 98-5 to Certain  Convertible  Instruments," which clarified certain
matters regarding the application of EITF 98-5.  Companies are required to adopt
EITF 00-27  prospectively to securities issued after November 16, 2000. However,
the SEC concluded that the consensus reached by the EITF in EITF 00-27,  Issue 1
of Part II, must be applied to all transactions  subject to EITF 98-5, including
those  transactions  occurring before November 16, 2000. The effect,  if any, of
the  initial  application  of the  consensus  on Issue 1 of Part II to all prior
transactions  subject  to Issue  98-5 is to be  recognized  in the  registrant's
fiscal year quarter in which the  consensus  was reached in a manner  similar to
the cumulative effect of a change in accounting  principle.  The Company did not
adopt  EITF 00-27 in the second  quarter of the year ended July 31,  2001,  even
though the Series B Shares transaction was subject to EITF 98-5. However, during
the fourth  quarter of the year ended July 31,  2001,  the  Company  changed its
method of accounting for convertible  securities to adopt the provisions of EITF
00-27. Upon adoption management  concluded that a portion of the proceeds of the
Series B Shares  should have been  allocated to the warrants  upon  modification
based on their relative fair value to the Series B Shares.  At the original date
of the  modification  of the  warrants  the Company did not  allocate any of the
proceeds  of the Series B Shares to the  warrants.  Management  determined  that
$1,554,000 of the Series B Shares  proceeds  should be allocated to the warrants
using  Black-Scholes  computations.  The Company has  recorded the effect of the
reallocation of the proceeds from the Series B Shares to the warrants  through a
reclassification of the $1,554,000 between the Series B Shares and Common Shares
in the consolidated  statement of  shareholders'  equity for the year ended July
31, 2000.  The  cumulative  effect of the change in accounting of $1,554,000 has
been reflected as a deemed  dividend to the holder of the Series B Shares in the
consolidated  statement of  operations  for the year ended July 31,  2001.  This
effect increased the net loss applicable to common  shareholder  (both basic and
diluted) by $0.25 per share.

   Stock Option Plans

     The Company has two stock option plans, the Stock Option Plan ("1993 Plan")
and the Second Amended and Restated Stock Award Plan ("1996 Plan").  At July 31,
2001,  the 1996 Plan provided for the grant to officers,  directors,  employees,
and  consultants  of  incentive  and  non-qualified  options to  purchase  up to
3,500,000  Common  Shares.  The 1996 Plan was amended in August 2001 and October
2001 to increase the number of Common Shares for which options may be granted to
4,000,000 and  4,500,000,  respectively.  There are options to purchase  120,000
Common  Shares  outstanding  under the 1993  Plan;  no further  options  will be
granted  under the 1993 Plan.  The exercise  price of options  granted under the
1996 Plan may not be less  than 75% of the fair  market  value of the  Company's
Common  Shares at the date of grant  (100%  for  tax-qualified  incentive  stock
options).  Options  become  exercisable  at the date of grant or in equal annual
installments  over a period of one to four  years  from the date of  grant.  The
options  generally  expire either five or ten years after the date of grant.  In
addition  to the  options  granted  under  the 1993 Plan and the 1996  Plan,  an
additional  80,000 options were granted during the years ended July 31, 1999 and
1998 to consultants in connection with capital raising and other activities.

     The 1996 Plan also  provides  for the grant of stock  appreciation  rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 2001, 2000 or 1999.


                                      -29-
<PAGE>



   The activity during the years ended July 31, 2001, 2000 and 1999 was as
follows:
<TABLE>
<CAPTION>


                                                                  2001               2000               1999
                                                            ------------------ ------------------ ------------------

                                                                  Weighted           Weighted            Weighted
                                                                   Average            Average             Average
                                                                  Exercise           Exercise            Exercise
                                                         Options   Price    Options   Price    Options    Price
                                                         -------   -----    -------   -----    -------    -----

<S>                                                     <C>        <C>      <C>       <C>      <C>        <C>
Outstanding   -  beginning of year                      2,574,000  $6.17    2,108,000 $6.73    1,640,000  $7.48

   Granted                                              1,413,000   2.52      853,000  5.20      655,000   5.56
   Exercised                                              (60,000)  1.28           --    --           --     --
   Canceled                                              (221,000)  6.89     (387,000) 7.09     (187,000)  8.70

Outstanding - end of year                                3,706,000  4.82    2,574,000  6.17    2,108,000   6.73
                                                         =========          =========          =========

Exercisable at end of year                               1,646,633 $6.05    1,240,953 $6.41      808,441   $6.53
                                                         =========          =========          =========

Weighted-average fair
value of Options granted during the year                           $2.28              $3.42                $4.26
                                                                   =====              =====                =====

</TABLE>

   The following table summarizes information about stock options outstanding at
July 31, 2001:

                        Options Outstanding              Options Exercisable
                -------------------------------------  -------------------------
                              Weighted-
                  Number       Average     Weighted-      Number     Weighted -
                Outstanding   Remaining     Average    Exercisable    Average
  Range of         as of     Contractual   Exercise       as of       Exercise
  Exercise       July 31,       Life         Price       July 31,      Price
   Prices          2001                                    2001
--------------  ------------ ------------  ----------  ------------- -----------
$2.01-- $3.50     1,355,000     9.85            2.37        170,000        2.35
 3.51--  5.00       475,000     8.44            4.16        238,213        4.16
 5.01--  6.50     1,028,000     6.08            5.94        562,670        6.00
 6.51--  8.00       636,600     5.64            6.94        517,200        6.97
 8.01--  9.50        56,000     4.18            8.24         42,000        8.24
 9.51-- 12.00       155,400     6.51           10.68        116,550       10.68
--------------  ------------                           -------------

$2.00--$12.00     3,706,000     7.67           $4.81      1,646,633      $ 6.05
                ============                           =============

   Stock options available for future grant totaled 0 and 251,000 at July 31,
2001, and 2000, respectively.


                                      -30-
<PAGE>

     No  compensation  cost has been  recognized for the Company's  stock option
grants to  employees  under APB No. 25 because  the  underlying  value of common
stock on the date of grant has equaled or  exceeded  the  exercise  price of the
options.  Total compensation cost recognized in the statements of operations for
options granted to non-employees  under SFAS No. 123 during the years ended July
31, 2001, 2000, and 1999, was $10,000, $26,000, and $203,000,  respectively. Pro
forma information regarding net income (loss) and net income (loss) per share is
required  under  SFAS No.  123 and has been  determined  as if the  Company  had
accounted for all its stock option  grants based on the fair value  method.  The
pro forma information  presented below is not representative of the effect stock
options will have on pro forma net income  (loss) or net income (loss) per share
for future years.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes multiple  option-pricing model. The following weighted average
assumptions were used for grants during the years ended July 31, 2001, 2000, and
1999:  risk-free  interest  rates of 5.44%,  6.04% and 5.92%,  respectively;  an
expected  option  life of 9.83 years,  9.59 years and 9.60 years,  respectively;
expected volatility of 122%, 106% and 90%,  respectively;  and dividend yield of
zero.

     The  Black-Scholes  method is one of many models used to calculate the fair
value of options that are freely tradable,  fully  transferable and that have no
vesting restrictions.  These models also require highly subjective  assumptions,
including future stock price volatility and expected time until exercise,  which
greatly affect the calculated values.

     Had  compensation  cost for these plans been  determined  based on the fair
value of awards at the grant date,  as  prescribed by SFAS No. 123, net loss and
net loss per share would have been as follows for the years ended July 31, 2001,
2000, and 1999:
<TABLE>
<CAPTION>

                                                          2001      2000      1999
                                                          ----      ----      ----
                                                    (in thousands, except per share data)

       Net loss attributable to common shareholders:
<S>                                                     <C>       <C>        <C>
          As reported........................           $(14,714) $(3,101)   $(4,884)
          Pro forma..........................           $(17,514) $(5,897)   $(6,176)
       Net loss per share (basic and diluted):
          As reported........................           $  (2.41) $ (0.51)   $ (0.80)
          Pro forma..........................           $  (2.87) $ (0.97)   $ (1.01)
</TABLE>

     Compensation  expense recognized in providing pro forma disclosures may not
be representative of the effects on pro forma net income (loss) for future years
because options vest over several years,  additional options may be granted each
year, and assumptions can change.

   Common Shares Reserved

     Common Shares reserved for future issuance at July 31, 2001, are as follows
(in thousands):

      Series A convertible preferred shares             2,667
      Series B convertible preferred shares             3,950
      Common share warrants                             2,000
      Stock option plans                                3,706
                                                       ------
                                                       12,323
                                                       ======


                                      -31-
<PAGE>




   Retained Earnings

     For as long as the  Company's  majority  shareholder  owns at least 666,666
Series A Shares or Series B Shares or Common  Shares  into which such  preferred
shares are convertible,  the Company may not without such holder's consent,  pay
any dividend or distribution on its Common Shares.  In addition,  under its line
of credit  with a  commercial  bank,  the  Company is required to maintain a net
worth of $24,700,000.  The Company is restricted in its ability to pay dividends
based on this net worth  requirement  and available  cash.  See Note 7, Lines of
Credit.

Note 9.  Income Taxes

Sonus Corp.  and its Canadian  subsidiary  file  separate  corporate  income tax
returns on a stand-alone basis in Canada.  Sonus-USA,  Inc. and its subsidiaries
file corporate  income tax returns in the United  States.  There is no provision
for  income  taxes for the years  ended  July 31,  2001,  2000,  and 1999 as the
Company incurred net operating losses.

A reconciliation  of the Company's  expected tax benefit using the United States
federal  statutory  income tax rate to the actual  effective  rate for the years
ended July 31, 2001, 2000, and 1999 is as follows:

                                              2001        2000         1999
                                              ----        ----         ----
   Tax benefit at statutory rate.......       (34)%       (34)%        (34)%
   Adjustment for higher Canadian tax
    rate...............................       ---           1          ---
   Expenses not deductible for tax
    purposes...........................         3           7            5
   State taxes, net of federal.........        (5)         (6)          (5)
   Change in valuation allowance
    impacting statement of operations..        36          32           34
                                               --          --           --
   Tax rate per financial statements...       --- %       --- %        --- %
                                             ----        ----         ----

     The  components  of  temporary  differences  that give rise to  significant
portions of deferred income taxes are as follows at July 31 (in thousands):

                                                  2001       2000      1999
                                                  ----       ----      ----
   Deferred tax assets:
    Net operating loss carryforwards........    $ 8,983   $  5,371   $  4,754
    Allowance for doubtful accounts.........        604      1,462        364
    Capitalized financing costs.............        228        473        694
    Other...................................        255        135         32
                                                 ------    -------    -------
                                                 10,070      7,441      5,844
   Deferred tax liabilities:
     Property and equipment due to differences     (662)      (609)       (83)
   in depreciation..........................
     Goodwill and start-up costs............       (268)      (368)      (305)
                                                -------   --------   --------
                                                  9,140      6,464      5,456
   Less valuation allowance.................     (9,140)  $ (6,464)  $ (5,456)
                                                -------   --------   --------
                                                $   ---   $    ---   $    ---
                                                =======   ========   ========

     At July 31,  2001,  the Company had  federal and state net  operating  loss
carryforwards  of  $19,100,000.  The Company also had $3,000,000 of Canadian net
operating  loss  carryforwards.  The  federal and state and  Canadian  operating
losses expire at various dates through 2021 if not utilized.

     A provision of the Internal  Revenue Code requires that the  utilization of
net  operating  losses  be  limited  when  there is a change of more than 50% in
ownership  of the  Company.  Such a  change  occurred  in  December  1997.  This
ownership  change may limit the  utilization  of any United  States  federal net
operating losses incurred prior to the change in ownership date.


                                      -32-
<PAGE>


Note 10.  Related Party Transactions

     Gregory J. Frazer,  Ph.D.,  an officer and former  director of the Company,
and Mr.  Frazer's  wife were  shareholders  in certain  Hearing Care  Associates
corporations  that the Company  acquired  during the fiscal years ended July 31,
1998 and 1997.  During  the year  ended  July 31,  1999,  the  Company  issued a
three-year  promissory  note to Mr. Frazer in the principal  amount of $102,000,
payable in equal  quarterly  installments,  in connection  with  purchase  price
adjustments  for hearing care centers  previously  acquired from Mr. Frazer.  At
July 31, 2001,  the note had a balance of $8,500.  Interest  paid to Mr.  Frazer
with  respect to the note for the years  ended  July 31,  2001,  2000,  and 1999
totaled $2,380, $5,100, and $3,570, respectively.  The Company also entered into
expanded  non-compete  agreements  with Mr.  Frazer and his wife that pay them a
total of $10,758 per month until September 2001.

     Mr.  Frazer and his wife have the  right,  until  September  30,  2001,  to
require the Company to redeem an aggregate of 1,680 of their Common Shares as of
the last  day of each  calendar  quarter  at a price of  $8.35  per  share.  The
redemption rights are  non-cumulative  and expire if not exercised as of the end
of any calendar quarter as to such quarter.  Pursuant to such redemption rights,
the  Company  redeemed  from Mr.  Frazer  and his wife 5,040  Common  Shares for
consideration of $42,084 during each of the fiscal years ended July 31, 2001 and
2000.

     On May 8, 1997,  Brandon M. Dawson, an officer and director of the Company,
exercised  options for 50,000  Common  Shares at $1.35 per share.  In connection
with the  exercise,  the Company made loans of $67,500 and $91,000 to Mr. Dawson
on May 8, 1997, and April 24, 1998, respectively, to allow Mr. Dawson to pay the
aggregate  exercise  price of the options and taxes  incurred as a result of the
exercise.  The loans, which bore interest at 10% and 7.75%,  respectively,  were
repaid on July 6, 1999,  along with  interest of $16,077.  On December 26, 1997,
the Company  loaned Mr.  Dawson  $29,187 in order to allow Mr. Dawson to repay a
loan  obtained in  connection  with the  exercise of options to purchase  20,000
Common  Shares.  The loan was repaid on March 30, 1999,  along with  interest at
7.75% per annum in the amount of $4,287.  On March 19, 1998,  the Company loaned
Mr.  Dawson  $35,790,  in order to pay  taxes  incurred  as a result  of  option
exercises  in April  1996.  The loan,  which  matured on  December  31, 2000 and
remains outstanding,  continues to bear interest at 7.75% per annum. The Company
recognized $8,000, $0, and $0, of interest income from the note during the years
ended July 31, 2001,  2000, and 1999,  respectively.  At July 31, 2001 and 2000,
accrued interest on the note totaled $8,000 and $0, respectively.

     On December 8, 1998,  the Company  loaned Scott Klein,  President and Chief
Operating  Officer of the Company,  $100,000 in connection  with the purchase of
his primary residence in Portland,  Oregon. The loan was repaid on June 7, 1999,
along with interest at 8% in the amount of $4,000.

     On July 21, 1999,  Cindy  Dawson-Austin,  mother of Mr. Dawson,  loaned the
Company $500,000 for working  capital.  The loan, along with interest at 12% per
annum in the amount of $23,342, was repaid on December 10, 1999.

     In April 1999, Mr. Dawson  purchased from an unrelated  party a convertible
note in the principal  amount of $492,693 that had been issued by the Company in
October 1996. The note was repaid on December 10, 1999.

     On December 19, 2000,  the Company  loaned Mr. Dawson $75,000 in connection
with the exercise by Mr. Dawson of previously  granted stock  options.  The full
recourse loan,  which bears interest at 9.5%, is secured by 60,000 Common Shares
and is due on  December  19,  2001.  The Company  recognized  $4,000 in interest
income on the note  during  the year  ended  July 31,  2001.  At July 31,  2001,
interest accrued on the note totaled $4,000.

     At July 31, 2001, the Company has a short-term  advance due from Mr. Dawson
in the amount of $53,000. The advance is unsecured and non-interest bearing.


                                      -33-
<PAGE>


Note 11.  401(k) Plan

     The Company  sponsors a 401(k) plan for all  employees  who have  satisfied
minimum  service and age  requirements.  Employees  may  contribute up to 20% of
their compensation to the plan, subject to annual limitations under federal law.
The Company does not match employee contributions.

Note 12.  Commitments and Contingencies

   Operating Leases

     The Company leases office  equipment and office space under  non-cancelable
operating  leases.  The Company's  office space leases contain  renewal  options
ranging from one to five years and rent escalation clauses based on the consumer
price index or defined escalation amounts set forth in the lease agreements.

     The following is a schedule by year of future  minimum  lease  payments for
non-cancelable operating leases at July 31, 2001 (in thousands):

   Year ending July 31:
   2002.....................................................$1,804
   2003..................................................... 1,351
   2004.....................................................   989
   2005.....................................................   340
   2006.....................................................    95
                                                            ------
   Total minimum lease payments                             $4,579
                                                            ======

     Rental  expense under  operating  leases was  $2,901,000,  $2,528,000,  and
$2,236,000 for the years ended July 31, 2001, 2000, and 1999, respectively.

   Contingent Payments

     The terms of certain of the Company's  acquisition  agreements  provide for
additional consideration to be paid if the acquired entity's revenues or results
of operations  exceed certain target levels.  Such additional  consideration  is
paid in cash and is  recorded  when earned as  additional  purchase  price.  The
maximum amount of contingent  consideration  that the Company may be required to
pay is $421,000 for the year ended July 31, 2002 and $246,000 thereafter.

   Regulatory Matters

     A portion of the  Company's  revenues  comes from the Medicare and Medicaid
programs.  Laws and regulations governing these programs are complex and subject
to  interpretation.  Except  as  noted  below,  the  Company  believes  that its
operations are in substantial compliance with existing laws that are material to
its  operations.  Any failure or alleged  failure to comply with applicable laws
and regulations could result in sanctions or penalties, including exclusion from
participation in the Medicare,  Medicaid,  and other  government  programs which
could have a material  adverse  effect on the Company's  consolidated  financial
statements.

     During the year ended July 31,  2001,  the Company  discovered  that it had
improperly  submitted certain claims to the State of California Medi-Cal program
("Medi-Cal")  for  hearing   services  and  instruments   provided  to  Medi-Cal
enrollees,  as the result of  services  performed  by  audiologists  and hearing
instrument  dispensers who had not been  credentialed  by Medi-Cal.  The Company
determined that it had received $474,000 and $566,000 during calendar years 2000
and 1999,  respectively,  that related to these improperly submitted claims. The
Company reported its discovery to Medi-Cal and received a response acknowledging
the Company's  representations to Medi-Cal that steps have been taken to prevent
a  reoccurrence.  Medi-Cal has not requested  that the Company repay the amounts
received and management  believes that it is unlikely that Medi-Cal will request
repayment in the future.  However, the ultimate  determination of this matter is
presently  unknown  and could have a material  adverse  effect on the  Company's


                                      -34-
<PAGE>


consolidated financial statements.

      Litigation

     The Company has filed a lawsuit against Siemens Hearing  Instruments,  Inc.
("Siemens") for breach of a hearing  instrument  supply  agreement.  The lawsuit
seeks damages in excess of $4,300,000.  Siemens has filed a counterclaim against
the Company  alleging  that  Siemens is owed  $920,000  for hearing  instruments
purchased by the Company on account and $104,000 for failure to pay a promissory
note  assumed  by the  Company.  As  this  litigation  is in its  early  stages,
management,  in  consultation  with outside legal counsel,  has not finalized an
opinion as to the ultimate outcome.

     During  the year ended  July 31,  2001,  the  Company  favorably  settled a
lawsuit it had filed against a supplier.  The  settlement  resulted in a gain of
$554,000 to the Company  that is  recorded in "Other,  net" in the  consolidated
statement of operations.

     The Company is a party to various other  lawsuits and claims  incidental to
its business.  In the opinion of management,  the ultimate  disposition of these
matters will not have a material  adverse  effect on the Company's  consolidated
financial statements.

   Insurance Coverage

     In the  ordinary  course of its  business  the  Company  may be  subject to
professional and products liability claims.  Professional and products liability
insurance coverage is obtained through the Company's general liability insurance
from an independent  insurance company. The maximum coverage level is $6,000,000
per  occurrence.  The Company  believes that it would have recourse  against the
manufacturer in the event of a product liability claim; however, there can be no
assurance  that  recourse  against  a  manufacturer  by  the  Company  would  be
successful  or  that  any  manufacturer  will  maintain  adequate  insurance  or
otherwise be able to pay any liability resulting from such a claim.

     The Company maintains workers'  compensation  insurance coverage through an
independent  insurance company and is self-insured for employee health benefits.
The Company  accrues for future  liability  arising from health  benefit  claims
based on a history of past claims.  The accrued  reserves  for  employee  health
benefits  include known  liabilities  of the program and an estimate of incurred
but not reported claims.

   California Board of Equalization Audit

     The  California  Board  of  Equalization  has  commenced  an  audit  of the
Company's  California sales and use tax returns for the period from July 1998 to
June 2001.  Based on a review of periods subject to audit,  management  believes
that the Company may owe an  additional  $200,000 and has  therefore  recorded a
liability in this amount at July 31, 2001, through a charge to income during the
year ended July 31, 2001.

   Supply Agreements

     During the years ended July 31, 2001, 2000, and 1999, the Company purchased
a majority of its hearing  instruments  from Siemens.  The Company has mitigated
its  exposure to the loss of Siemens as a supplier by shifting  its  business to
other hearing instrument suppliers.

     Concurrent with the execution of the Credit Agreement,  the Company entered
into a  seven-year  sales  agreement  (the "Sales  Agreement")  with the hearing
instrument supplier.  Beginning with the period from October 1, 2001 to December
31 2001,  and for each  calendar  year  thereafter,  the  Company is required to
purchase  a minimum  number of hearing  instruments  from the  supplier.  If the
minimum purchase  requirement is not met in any period,  the Company is required
to refund to the  supplier a portion of the  discounted  sales  price of hearing
instruments  purchased by the Company during such period.  The Company is unable
to estimate its future annual  purchase  commitments  under the Sales  Agreement
because such annual  commitments  vary based upon  certain  factors that are not
determinable at the present time. See Note 7, Lines of Credit.


                                      -35-
<PAGE>



   Termination Benefits

     During the year ended July 31,  2001,  the  Company  recorded  $166,000  of
termination  benefits  associated  with  the  cost of  terminating  an  employee
contract. The amount has been included in general and administrative expenses.

Note 13.  Segment Information

     The Company has one  operating  segment:  the sale and servicing of hearing
instruments  and the  provision of audiology  services  primarily to  individual
consumers. No customer constituted more than 10% of total revenues.  Revenues by
country were as follows for the years ended July 31:

      (in thousands)               2001        2000       1999
                                   ----        ----       ----
      United States........       $45,667    $40,353     $30,511
      Canada...............         3,267      3,606       3,248
                                   ------     ------      ------
      Total................       $48,934    $43,959     $33,759
                                  =======    =======     =======


     The  functional  currency  of  the  Company's  Canadian  operations  is the
Canadian  dollar while the  functional  currency of the Company's  United States
operations is the United States dollar. In accordance with SFAS No. 52, "Foreign
Currency  Translation",  assets and liabilities recorded in Canadian dollars are
remeasured at current rates in existence at the balance sheet date. Revenues and
expenses are remeasured using the weighted average exchange rate for the period.
Exchange gains and losses from remeasurement of assets and liabilities  recorded
in Canadian dollars are treated as unrealized gains and losses and reported as a
separate component of shareholders' equity.

     The historical  effects of the change in currency  exchange rates have been
immaterial.  At July 31, 2001 and 2000, the net assets of the Company located in
Canada total $1,404,000 and $1,962,000, respectively.

Note 14.  Subsequent Events

   In August 2001, the Company acquired two hearing care centers for a total
purchase price of $510,000. The Company has paid $375,000 of the total purchase
price in cash, with $33,750 due in March 2002 and the remaining balance due in
annual principal payments of $33,750 beginning in August 2002 through August
2004. The transaction was accounted for as a purchase.

Note 15.  Quarterly Results of Operations  (Unaudited)



     During the fourth  quarter the Company made certain  adjustments  that were
material to the results of each  quarter  during the year ended July 31,  2001as
follows:

Amounts DueTo/FromVendors

     During  the first  three  quarters  of the year ended  July 31,  2001,  the
Company recorded receivables under a revenue sharing arrangement with Siemens in
the aggregate  amount of $790,000.  On May 25, 2001, the Company filed a lawsuit
against  Siemens for breach of its hearing  instrument  supply contract with the
Company.  Siemens  subsequently filed a counterclaim against the Company on July
31,  2001.  (See Note 12),  and  discontinued  its hearing  instrument  supplier
relationship with the Company.  As a result of the discontinuance of the hearing
instrument  supplier  relationship  the  revenue  sharing  arrangement  was also
terminated.  To mitigate its loss of the Siemens  supplier  contract the Company
formalized a new hearing  instrument  supply contract with another vendor on May
31, 2001. As a result of these matters,  management  assessed the collectibility
of the  receivable  due  from  Siemens  under  the  terminated  revenue  sharing
arrangement  and  concluded  that due to the  uncertainty  of the outcome of the



                                      -36-
<PAGE>



litigation and the termination of the supplier  relationship  with Siemens,  the
Company should reverse the  previously  recorded  receivables of $790,000 in the
fourth  quarter.  In addition,  due to historical  problems with the accuracy of
statements  received from hearing instrument  suppliers the Company did not rely
on supplier  statements to record amounts due to or from  suppliers,  but rather
relied on its own internal  system of monitoring  hearing  instrument  sales and
purchases  to  determine  amounts  owed to or from  vendors.  During  the fourth
quarter, and continuing subsequent to year-end,  the Company began to refine its
internal  process  of  estimating  amounts  due to or  from  vendors,  including
verifying the accuracy of hearing  instrument vendor  statements.  Based on this
process  the  Company  increased  its  estimate  of the amount due to vendors by
$1,206,000 at July 31, 2001.

Restatement of Revenues

     During the July 31, 2001 year-end  closing  process  management  determined
that the Company's  accounts  receivable  were misstated as a result of internal
control  deficiencies  in accounts  receivable  and billing  systems  throughout
fiscal year 2001. These deficiencies were primarily related to failure to:

     (1) Update contractual allowances for most current collection experience,

     (2) Send reimbursement invoices to insurers in a timely manner resulting in
         an inability to maximize collections,

     (3) Write-off  residual  balances  remaining in accounts  receivable  after
         payments from insurance carriers had been received, and

     (4) Adjust  receivables  recorded  from  one  payor  (State  of  California
         Medi-Cal  program ) for which  certain of the  Company's  hearing  care
         providers  were  not   credentialed  to  bill  Medi-Cal  and  therefore
         ultimately could not be collected. See Note 12.

Because  of the  nature of the above  factors  the  Company  concluded  that the
adjustment  was a result of the correction of an error as opposed to a change in
estimate,  and  therefore  restatement  of the first three  quarters of 2001 was
appropriate.

Other Adjustments

     An additional  accrual for marketing  expenses was made based on changes in
management's  estimates.  Adjustments  related  to  changes  in  the  method  of
accounting  for revenue under SAB 101 and for  beneficial  conversion and deemed
dividends related to convertible  securities are more fully described in Notes 1
and 8.


     These  adjustments  decreased and (increased) the net loss  attributable to
common shareholders by quarter as follows:
<TABLE>
<CAPTION>
                                                    Quarter Ended
                                      -------------------------------------------------
                                        October 31,    January 31,  April 30,  July 31,
                                          2000           2001        2001       2001
                                          ----           ----        ----       ----
                                                  (in thousands)
<S>                                     <C>                <C>         <C>         <C>
   Adjust    amounts   due   to/from   $   ---        $   ---     $   ---     $(1,996)
   vendors
   Change in accounting for revenue     (2,220)            (4)         36          68
   Beneficial conversion related to        ---         (1,554)        ---         ---
     warrant modification
   Quarterly effect of deemed           (4,890)          (297)       (304)       (310)
     dividends to preferred
     shareholder upon contingency
     resolution
   Additional   marketing   expenses       ---            ---         (25)        (78)
   accrual
   Restatement of revenues              (1,028)          (918)       (854)     (1,004)
                                        ---------------------------------------------

                                       $(8,138)       $(2,773)    $(1,147)    $(3,320)
                                        =======        =======     =======     =======

</TABLE>

                                      -37-
<PAGE>


These  adjustments  increased  the net  loss  per  share  applicable  to  common
shareholders by $1.34, $0.46, $0.18, and $0.54, in the first, second, third, and
fourth quarters, respectively.

     The following is a summary of the quarterly  results of operations  for the
year ended July 31, 2001, as previously  reported and as restated to reflect the
effect of the adjustments noted above.




                                      -38-
<PAGE>


<TABLE>
<CAPTION>

                                                  Quarter Ended
                        ------------------------------------------------------------------------------------------------------------
                          October 31, 2000           January 31, 2001             April 30, 2001            July 31, 2001
                        As Previously                As Previously                As Previously
                          Reported   As Restated     Reported      As Restated    Reported     As Restated  As Reported
                        ------------------------------------------------------------------------------------------------------------
                                      (in thousands, except per share data)

<S>                       <C>           <C>          <C>            <C>            <C>          <C>          <C>
Net Revenues              $13,562       $12,428      $12,370        $11,448        $12,889      $ 12,070     $12,988
Product gross profit        6,603         5,233        5,901          4,765          5,667         4,575       4,033
Income (loss) from
 operations                   191          (943)         232           (690)           107          (737)     (3,011)
Income (loss) before
 cumulative effect of
 change in accounting
 principle                    104        (1,030)         728           (194)            28          (816)     (3,205)
Cumulative effect of
 change in accounting
 principle                    ---        (2,114)         ---            ---            ---           ---         ---
Net income (loss)             104        (3,144)         728           (194)            28          (816)     (3,205)
Deemed dividends to
 preferred shareholder        ---        (4,890)         ---         (1,851)           ---          (304)       (310)
Net income (loss)
 attributable to common
 shareholders                 104        (8,034)         728         (2,045)            28        (1,120)     (3,515)
Income (loss) per share
 before cumulative
 effect of change in
 accounting principle
 (basic)                     0.02         (0.17)        0.12          (0.04)          0.00         (0.13)      (0.52)
Income (loss) per share
 before cumulative
 effect of change in
 accounting principle
 (diluted)                   0.01         (0.17)        0.06          (0.04)          0.00         (0.13)      (0.52)
Cumulative effect of
 change in accounting
 principle per share
 (basic and diluted)          ---         (0.35)         ---            ---            ---           ---         ---
Deemed dividends to
 preferred shareholder
 (basic and diluted)          ---         (0.80)         ---          (0.30)           ---         (0.05)      (0.05)
Net income (loss) per
 share attributable to
 common shareholders
 (basic)                     0.02         (1.32)        0.12          (0.34)          0.00         (0.18)      (0.57)
Net income (loss) per
 share attributable to
 common shareholders
 (diluted)                   0.01         (1.32)        0.06          (0.34)          0.00         (0.18)      (0.57)


</TABLE>


                                      -39-
<PAGE>




     The following is a summary of the quarterly  results of operations  for the
year ended July 31, 2000.
<TABLE>
<CAPTION>
                                                               Quarter ended
                                           October 31, 1999    January 31, 2000    April 30, 2000  July 31, 2000
                                           ----------------    ----------------    --------------  -------------
                                                            (in thousands, except per share data)

<S>                                               <C>          <C>                  <C>            <C>
Net revenues                                      $10,102      $    10,387          $    12,083    $    11,387
Product gross profit                                5,803            6,072                6,717          5,773
Income (loss) from operations                        (569)            (530)                  86         (1,987)
Net income (loss)                                    (623)            (521)                 111         (2,068)
Net income (loss) per share (basic)                 (0.10)           (0.09)                0.02          (0.34)
Net income (loss) per share (diluted)               (0.10)           (0.09)                0.01          (0.09)
</TABLE>

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a) (1) The  following  financial  statements  are  filed as a part of this
report:

          (i)   Consolidated Balance Sheets as of July 31, 2001 and 2000.
          (ii)  Consolidated  Statements of Operations  for the years ended July
                31, 2001, 2000, and 1999.
          (iii) Consolidated  Statements of Changes in Shareholders'  Equity for
                the years ended July 31, 2001, 2000, and 1999.
          (iv)  Consolidated  Statements  of Cash Flows for the years ended July
                31, 2001, 2000, and 1999.

     (2) Schedule II - Valuation and Qualifying Accounts,  is filed as a part of
this report and contained on page 57. All other schedules for which provision is
made in the  applicable  accounting  regulations  of the Securities and Exchange
Commission are not required under the related  instructions or are  inapplicable
and therefore have been omitted.

     (3)  Exhibits to this  report are listed in the  Exhibit  Index on page 55.
Each  management  contract or  compensatory  plan or arrangement  required to be
filed as an exhibit to this  report is marked  with an  asterisk  in the Exhibit
Index.

(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during
    the fourth quarter of the fiscal year ended July 31, 2001.



                                      -40-
<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of
1934,  the registrant has caused this Amendment No. 1 to its report on Form 10-K
to be  signed on its  behalf  by the  undersigned,  thereunto  duly  authorized.


Date:  September 10, 2002                  SONUS CORP.


                                           By: /s/ Mark Richards
                                               ----------------------------
                                               Mark Richards
                                               Senior Vice President and
                                               Chief Financial Officer
                                               (Authorized Signatory and
                                                Principal Financial and
                                                Accounting Officer)



                                      -41-
<PAGE>


CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel J. Kohl, certify that:

     1. I have reviewed this quarterly report on Form 10-K/A of Sonus Corp.;

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report; and

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report. (1)

Date:  September 10, 2002                    /s/ Daniel J. Kohl
                                             ----------------------------------
                                             Name:  Daniel J. Kohl
                                             Title:  Chief Executive Officer


------------------------

(1) Portions of the  certifications  required by Section 302 are omitted  herein
pursuant  to  the  transition  rule  adopted  by  the  Securities  and  Exchange
Commission in Release No. 34-46427.



                                      -42-
<PAGE>




                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mark Richards, certify that:

     1. I have reviewed this annual report on Form 10-K/A of Sonus Corp.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report; and

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report. (1)

Date:  September 10, 2002                 /s/ Mark Richards
                                          ------------------------------
                                          Name:  Mark Richards
                                          Title:  Chief Financial Officer


------------------------

(1) Portions of the  certifications  required by Section 302 are omitted  herein
pursuant  to  the  transition  rule  adopted  by  the  Securities  and  Exchange
Commission in Release No. 34-46427.



                                      -43-
<PAGE>


                           CERTIFICATIONS PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In  connection  with  Amendment No. 1 to  the  Annual Report of Sonus Corp.
(the  "Company")  on  Form 10-K/A for the period ended July 31, 2001,  as f iled
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
I, Daniel J. Kohl, Chief Executive Officer of the Company,  certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the  Sarbanes-Oxley Act of
2002, that:

     The Report fully complies with the  requirements  of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and

     The information  contained in the Report fairly  presents,  in all material
respects, the financial condition and results of operations of the Company.



Date:  September 10, 2002                 /s/ Daniel J. Kohl
                                          ---------------------------------
                                          Name:  Daniel J. Kohl
                                          Title:  Chief Executive Officer




     In connection  with  Amendment  No. 1 to  the  Annual Report of Sonus Corp.
(the  "Company")  on Form 10-K/A for the period ended July 31, 2001,    as filed
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
I, Mark Richards, Chief Financial Officer of the Company,  certify,  pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the  Sarbanes-Oxley Act of
2002, that:

     1. The Report fully  complies  with the  requirements  of section  13(a) or
15(d) of the Securities Exchange Act of 1934; and

     The information  contained in the Report fairly  presents,  in all material
respects, the financial condition and results of operations of the Company.



Date:  September 10, 2002                  /s/ Mark Richards
                                           --------------------------------
                                           Name:  Mark Richards
                                           Title:  Chief Financial Officer




                                      -44-
<PAGE>




                                  Exhibit Index



 Exhibit                       Description of Exhibit

3.1       Articles of Incorporation of the Company. Incorporated by reference to
          Exhibit  3.1 to the  Company's  Annual  Report on Form  10-KSB for the
          fiscal year ended July 31, 1999 (the "1999 Form 10-KSB").
3.2       Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
          Company's  quarterly  report  on Form  10-QSB  for the  quarter  ended
          January 31, 1999.
10.1      Securities Purchase Agreement between the Company and Warburg,  Pincus
          Ventures,  L.P.  ("Warburg") dated November 21, 1997.  Incorporated by
          reference to Exhibit 99.2 to the Company's  current report on Form 8-K
          filed November 25, 1997.
10.2      Securities  Purchase  Agreement  between the Company and Warburg dated
          October  1,  1999.  Incorporated  by  reference  to  Exhibit  4 to the
          Company's current report on Form 8-K filed October 12, 1999.
10.3      Amended and Restated Warrant Agreement between the Company and Warburg
          dated  October 1, 1999,  and  related  Amended  and  Restated  Warrant
          Certificate  dated  October  1, 1999.  Incorporated  by  reference  to
          Exhibit 10.3 to the 1999 Form 10-KSB.
10.4      Form of Convertible  Subordinated  Note.  Incorporated by reference to
          Exhibit 10.4 to the 1999 Form 10-KSB.
10.5      1993 Stock Option Plan.  Incorporated by reference to Exhibit 10.26 to
          the Company's Registration Statement on Form SB-2 filed March 12, 1997
          (File No. 333-23137) (the "SB-2).*
10.6      Second  Amended and Restated  Stock Award Plan (as amended  October 4,
          2001).*/***
10.7      Employment  Agreement dated October 1, 1996,  between  Sonus-USA,  and
          Gregory J. Frazer.  Incorporated  by reference to Exhibit 10.28 to the
          SB-2.*
10.8      Employment  Agreement dated December 24, 1997, between the Company and
          Brandon M.  Dawson.  Incorporated  by  reference  to Exhibit  10.30 to
          Post-Effective Amendment No. 1, filed March 5, 1998 to the SB-2.*
10.9      Amendment to Employment  Agreement effective May 21, 2001, between the
          Company and Brandon M. Dawson.*/***
10.10     Employment  Agreement dated October 30, 1998,  between the Company and
          Scott  Klein.  Incorporated  by  reference  to  Exhibit  10.1  to  the
          Company's  quarterly  report  on Form  10-QSB  for the  quarter  ended
          October 31, 1998.*
10.11     Amendment to Employment Agreement effective June 20, 2001, between the
          Company and Scott Klein.*/***
10.12     Employment  Agreement dated February 11, 2000, between the Company and
          Paul C.  Campbell.  Incorporated  by  reference  to  Exhibit 10 to the
          Company's  quarterly  report  on Form  10-QSB  for the  quarter  ended
          January 31, 2000.*
10.13     Employment  Agreement  effective May 21, 2001, between the Company and
          Daniel J. Kohl.  Incorporated  by  reference  to  Exhibit  10.1 to the
          Company's  quarterly  report on Form 10-Q for the quarter  ended April
          30, 2001.*
10.14     Employment  Agreement effective July 19, 2001, between the Company and
          Mark Richards.*/***
10.15     Employment  Agreement effective September 1, 2001, between the Company
          and James Merideth-Webb.*/***
10.16     Employment  Agreement effective September 4, 2001, between the Company
          and Daniel W. Quall.*/***
10.17     Consulting  Agreement  effective  as of January 1, 1997,  between  the
          Company and Hugh T.  Hornibrook.  Incorporated by reference to Exhibit
          10.33 to the SB-2.*
10.18     Promissory Note of Brandon M. Dawson dated March 19, 1998, as amended,
          and related Pledge Agreement between the Company and Mr. Dawson, dated
          May 1, 1998.  Incorporated  by reference to Exhibit  10.11 to the 1999
          Form 10-KSB.*
10.19     Noncompetition  Agreement dated January 25, 1999,  between  Sonus-USA,
          Inc. and Gregory J. Frazer. Incorporated by reference to Exhibit 10.15
          to the 1999 Form 10-KSB.
10.20     Amendment  Agreement  effective  as of August 1, 1998,  by and between
          Sonus-USA,  Inc. and Gregory J. Frazer.  Incorporated  by reference to
          Exhibit 10.16 to the 1999 Form 10-KSB.
10.21     Promissory  Note  of  Brandon  M.  Dawson  dated  December  19,  2000.
          Incorporated  by  reference to Exhibit 10 to the  Company's  quarterly
          report on Form 10-Q for the quarter ended January 31, 2001.*
10.22     Credit  and  Guaranty  Agreement  dated  as of  May  31,  2001,  among
          Sonus-USA,  Inc., as Borrower, the Company, as Guarantor, and GN Great
          Nordic A/S, as lender.**/***



                                      -45-
<PAGE>

10.23     GN ReSound North America Sales Agreement  dated May 31, 2001,  between
          GN  ReSound  North  America   Corporation  and  Sonus-USA,   Inc.  and
          Sonus-Canada   Ltd.,   and   for   certain   limited   purposes,   the
          Company.**/***
10.24     First  Amendment dated as of November 19, 2001, to Credit and Guaranty
          Agreement  dated  as of May  31,  2001,  among  Sonus-USA,  Inc.,  the
          Company, and GN Great Nordic A/S./***
10.25     First  Amendment  dated as of November 19, 2001,  to GN ReSound  North
          America Sales Agreement  dated as of May 31, 2001,  between GN ReSound
          North America Corporation and Sonus-USA,  Inc., Sonus-Canada Ltd. and,
          for certain limited purposes described therein, the Company./***
10.26     Consulting Agreement dated August 2, 2001, between Sonus-USA, Inc. and
          Randall E. Drullinger.*/***
21        The  Company's   subsidiaries   are  SONUS-USA,   Inc.,  a  Washington
          corporation,   Sonus-  Canada  Ltd.,  a  British   Columbia   (Canada)
          corporation,   Sonus-Texas,   Inc.,  an  Oregon   corporation,   Sonus
          Acquisition  Corp.,  an Oregon  corporation,  and Hear PO Corp., a New
          Mexico corporation.
23.1      Consent of Ernst & Young LLP
23.2      Consent of KPMG LLP.
24        Power of attorney of certain officers and directors.

-----------

*     Management contract or compensatory plan or arrangement.
**    Portions omitted pursuant to a request for confidential treatment filed
      with the Securities and Exchange Commission.
***   Previously Filed


                                      -46-
<PAGE>


<TABLE>
<CAPTION>


                  Schedule II Valuation and Qualifying Accounts

Column A                      Column B           Column C       Column D     Column E
-------------------------------------------------------------------------------------------
                                               Additions        Deductions
                                     -----------------------------------
                                                  Charged to
                                      Charged to   Other
                      Balance at      Costs and   Accounts: Deductions:   Balance at End
   Description    Beginning of Period Expenses    Describe  Describe (1)    of Period
-------------------------------------------------------------------------------------------

Year ended July 31, 2001
Deducted from asset
accounts:
  Allowance for
<S>                     <C>            <C>         <C>       <C>           <C>
  doubtful accounts     $3,691,000     $851,000    $---      $(3,041,000)  $ 1,501,000
  Inventory reserve            ---       78,000     ---          ---            78,000

Year ended July 31, 2000
Deducted from asset
accounts:
  Allowance for
  doubtful accounts        907,000    2,691,000     ---           93,000      3,691,000

Year ended July 31, 1999
Deducted from asset
accounts:
  Allowance for
  doubtful accounts        684,000      389,000     ---         (166,000)       907,000

---------------------

(1) Uncollectible accounts written off, net of recoveries.
</TABLE>


                                      -47-